SALE - UNC School of Government · 1. Foreclosure is a method of enforcing payment of a debt...

August 2012 130.1

FORECLOSURE UNDER POWER OF

SALE

I. Introduction

A. In general.

1. Foreclosure is a method of enforcing payment of a debt secured by a

mortgage or deed of trust upon real property by selling the real

property and applying the proceeds of the sale towards the

satisfaction of the debt.

2. Reference will be made in this outline to deeds of trust, by far the

most common real property security instrument in North Carolina,

but the same principles are equally applicable to mortgages with

powers of sale and other analogous documents.

a) Deeds of trust (three-party instruments), rather than

mortgages (two-party instruments), are used almost

exclusively in North Carolina. By using a third party as

trustee, the lender is allowed to purchase the secured real

property at the foreclosure sale and thus protect its interest.

b) If the lender in a two-party mortgage (or the trustee in a

three-party deed of trust) bids in and purchases the property

at foreclosure, the sale is voidable by the debtor not because

there is, but because there may be, fraud. [Lockridge v.

Smith, 206 N.C. 174, 173 S.E. 36 (1934).] Note: It is

common for the trustee to put in a bid on behalf of the

lender, which does not violate the prohibition against

purchase by the trustee.

3. In North Carolina, foreclosure must be either by a civil action, with

the sale held pursuant to the judicial sale provisions in G.S. § 1-

339.1 through 1-339.40, or, if expressly provided in the deed of trust

or mortgage, by power of sale pursuant to G.S. § 45-4 through 45-

21.33. Foreclosure by civil action is extremely rare; almost always

the foreclosure is done under a power of sale. This chapter covers

foreclosure by power of sale. (For sale after a civil action, see

chapter in this manual entitled Judicial Sales, Civil Procedures,

Chapter 43.)

4. Provisions regarding foreclosure by power of sale do not affect any

right to foreclosure by judicial sale. [G.S. § 45-21.2]

5. The power of sale is created in the instrument itself, usually a deed

of trust, which is security for an obligation or debt, usually

evidenced by a promissory note.

FORECLOSURE UNDER POWER OF SALE

130.2

B. Parties.

1. The debtor or borrower (property owner) may be referred to as the

trustor or mortgagor.

2. The lender or creditor or holder of a deed of trust or mortgage may

be referred to as the mortgagee.

3. The third party between the debtor and lender created by a deed of

trust is known as the trustee.

4. In a deed of trust, the debtor (the party of the first part) conveys legal

title of the real property to the trustee (the party of the second part),

which the trustee holds in trust for both the debtor and the lender (the

party of the third part).

C. Power of sale.

1. The terms of the instrument may give the trustee power to sell the

real property by foreclosure on behalf of the lender if the debtor

defaults on the loan secured by the deed of trust.

2. Upon default on the loan by the debtor, the lender may request that

the trustee proceed to foreclose on the secured real property,

according to the terms of the deed of trust.

3. The debtor has the right to terminate the power of sale by curing the

default, which may mean paying the full amount due under the note,

plus costs.

D. Procedure.

1. Since the procedure to enforce rights under G.S. § 45-21.1 et seq. is

instituted by filing a notice of hearing instead of a complaint and

summons, it is characterized as a “special proceeding.” [Phil

Mechanic Constr. Co. v. Haywood, 72 N.C. App. 318, 325 S.E.2d 1

(1985).]

2. Although a foreclosure is characterized as a special proceeding, the

clerk does not issue a special proceeding summons. The procedure

for foreclosures is strictly regulated by G.S. § 45-21.1 et seq. [Id.]

(Foreclosures not governed by G.S. Chapter 1, Article 33, Special

Proceedings.)

3. Any notice, order or other papers required by G.S. Chapter 45,

Article 2A to be filed must be filed in the same manner as a special

proceeding. [G.S. § 45-21.16(g)]

E. Set out below is the order of proceedings in a foreclosure; each stage of the

process is discussed in detail later in the outline.

1. Notice by trustee

2. Hearing by clerk

3. Sale by trustee

4. Report of sale


130.3

5. Upset bid periods

6. If there is a defaulting bidder, resale followed by upset bid periods

7. Final report of sale and account by trustee

8. Audit by clerk

9. Order of possession, if needed

10. Clerk’s receipt of surplus proceeds in certain cases

II. Trustee

A. Role of trustee.

1. In general.

a) Trustee (usually an attorney) initiates the foreclosure process

upon request of the lender.

b) Trustee is a fiduciary to both the lender and debtor, and does

not advocate for either at a foreclosure hearing. [Mills v.

Mutual Bldg. & Loan Ass’n., 216 N.C. 664, 6 S.E.2d 549

(1940).]

c) Trustee has a fiduciary duty to use diligence and fairness in

conducting the sale. [Sloop v. London, 27 N.C. App. 516,

219 S.E.2d 502 (1975).]

d) Trustee (or agent) cannot bid on or purchase the property at

the sale. [Lockridge v. Smith, 206 N.C. 174, 173 S.E.2d 36

(1934).] Note: It is common for the trustee to put in a bid on

behalf of the lender, which does not violate this prohibition.

2. Special considerations for a trustee who is an attorney:

a) Trustee who is also an attorney is subject to the Rules of

Professional Conduct governing lawyers. (See 2003

Amended Revised Rules of Professional Conduct; 27 N.C.

Admin. Code (2003)).

b) The responsibilities of an attorney in the role of trustee

primarily arise from that trustee’s fiduciary relationship with

the lender and debtor as opposed to an attorney-client

relationship with either party. This fiduciary relationship

requires impartiality toward trustor and beneficiary at a

foreclosure hearing.

c) For guidance as to the role of a trustee in the context of

contested matters during the foreclosure hearing and in

proceedings subsequent to and related to the foreclosure, see

Rule 1.7, Amended Revised Rules of Professional Conduct;

RPC 82; and RPC 90.

3. A trustee who is not an attorney is not bound by ethics rules and

ethics opinions governing lawyers, but he or she still has a fiduciary

responsibility to both debtor and lender.


130.4

B. Substitute trustee.

1. There can be, and usually is, a substitution of the originally named

trustee before initiating a foreclosure.

2. Holders or owners of a majority of the amount of the indebtedness

secured by the deed of trust may, in their discretion, substitute the

trustee by executing a written document properly recorded pursuant

to G.S. Chapter 47, Probate and Registration. [G.S. § 45-10(a); 45-

16]

3. A substitute trustee succeeds to all the rights, title and duties of the

original trustee and has the power to foreclose the instrument

according to its terms upon default. [G.S. § 45-10(b), (c); Pearce v.

Watkins, 219 N.C. 636, 14 S.E.2d 653 (1941).] The original trustee’s

powers cease upon the recording of the assignment to the successor

trustee.

4. Before proceeding in a foreclosure hearing where there is a

substitute trustee, the clerk should check the time and date of the

recording of the substitution instrument to make sure that the

trustee initiating foreclosure has the authority to exercise the

power of sale at the time of filing. If the notice of hearing was filed

before the recording of the substitution instrument, the trustee must

dismiss the case and reinstitute it by filing a new notice of hearing.

[See In re Foreclosure of Gilmore, 206 N.C. App. 596, 698 S.E.2d

768 (2010) (unpublished opinion).]

C. Successor trustee.

1. The substitute trustee provision of G.S. § 45-10(a), discussed above,

is almost always the provision invoked when a change in trustee is

desired. Other special circumstances, however, can also arise in

which the clerk may be asked to appoint a successor trustee pursuant

to other statutory provisions.

2. Examples: G.S. § 45-6 (appointment of successor when executor or

administrator of deceased trustee renounces trust); G.S. § 45-9

(appointment of successor to incompetent trustee); and G.S. § 45-11

(appointment of successor upon application of subsequent or prior

lienholder).

D. Trustee compensation.

1. The trustee conducting sale is entitled to compensation as provided

in the deed of trust. [G.S. § 45-21.15(a)]

a) If no sale is held, see special provisions for “partial”

compensation in G.S. § 45-21.15(b).

b) Trustees may not be granted a commission pursuant to G.S.

§ 32-54, which sets out a statutory compensation amount for

trustees, because that statute applies to trusts covered under

G.S. Chapter 36C, which excludes trustees under a deed of

trust. [G.S. §§ 32-53(4); 36C-1-103(22)]


130.5

2. Attorney fees to trustee’s attorney. Although not specifically listed

in G.S. § 45-21.31(a)(1), the fees a trustee must pay to an attorney

representing the trustee in a foreclosure proceeding are costs and

expenses of the sale, and therefore must be paid to the trustee. [In re

Vogler Realty, Inc., 722 S.E.2d 459 (N.C. 2012); Merritt v. Edwards

Ridge, 323 N.C. 330, 372 S.E.2d 559 (1988).]

E. Attorney fees to the trustee.

1. Except in unusual circumstances, there is no authority to justify

receipt by a trustee/attorney of both a trustee’s fee and a separate

attorney fee for a foreclosure under power of sale contained in a deed

of trust.

a) A trustee/attorney cannot ethically assume the role of an

advocate for one party against the other. Therefore, G.S. § 6-

21.2 (authorizing enforcement of obligation to collect

attorney fees in notes) should not be read to permit

trustee/attorney to collect additional attorney fee in

foreclosure under power of sale contained in deed of trust

since that statute deals with attorney fees of the lender’s

attorney. [In re Vogler Realty, Inc., 722 S.E.2d 459 (N.C.

2012).]

(1) Lender may be able to bring separate civil action to

enforce obligation in note to pay attorney fees

pursuant to G.S. § 6-21.2, except where note secured

by purchase money mortgage or deed of trust (seller

extends credit to buyer to purchase the property).

[See Merritt v. Edwards Ridge, 323 N.C. 330, 372

S.E.2d 559 (1988); Colson & Colson Constr. Co. v.

Maultsby, 103 N.C. App. 424, 405 S.E.2d 779

(1991).] G.S. § 45-28.38, which prohibits deficiency

judgments, applies only to purchase money

mortgages and deeds of trust. [See Childers v.

Parker’s, Inc., 274 N.C. 256, 162 S.E.2d 481

(1968).]

(2) See also Coastal Prod. Credit v. Goodson Farms, 70

N.C. App. 221, 319 S.E.2d 650 (1984) (attorney fees

for time spent in bankruptcy, foreclosure and

receivership actions reasonably related to collection

of underlying promissory note allowed under G.S. §

6-21.2.)

2. Clerk’s audit. However, the clerk does not have authority to

review for reasonableness a trustee-attorney’s payment of

attorney fees to himself or herself in the context of an audit of the

final sale of the property. The Supreme Court has held that this

action would involve an improper exercise of the clerk’s judicial

discretion. [In re Vogler Realty, Inc., 722 S.E.2d 459 (N.C. 2012)

(majority holding that clerk was not authorized to reduce an attorney


130.6

fee to trustee who had, contrary to law, paid himself 15% of the

underlying debt pursuant to G.S. § 6-21.2).]

III. Foreclosure Hearing

A. Basis for hearing.

1. A trustee seeking to exercise a power of sale upon a default must

schedule a hearing with the clerk and serve a notice of hearing

pursuant to the requirements of G.S. § 45-21.16 and any

requirements in instrument itself. (See section III.B below for notice

of hearing requirements.)

a) A hearing is required, by statute and due process, to give

debtor opportunity to be heard before his or her property is

foreclosed and sold. [Fleet Nat’l Bank v. Raleigh Oaks Joint

Venture, 117 N.C. App. 387, 451 S.E.2d 325 (1994); Turner

v. Blackburn, 389 F. Supp. 1250 (W.D.N.C. 1975).]

b) Historically, foreclosure under power of sale has been a

private contractual remedy; the purpose of the notice and

hearing provisions of G.S. § 45-21.16 is to satisfy minimum

due process requirements, not alter the essentially

contractual nature of the remedy. [In re Burgess, 47 N.C.

App. 599, 267 S.E.2d 915 (1980).]

c) Hearing under G.S. § 45-21.16 is designed to provide a less

time-consuming and less expensive procedure than

foreclosure by action and is not intended to settle all matters

in controversy. [In re Foreclosure of Helms, 55 N.C. App.

68, 284 S.E.2d 553 (1981).]

2. Doubts as to interpretation of the statutes should be resolved not in

favor of the unrestricted power of the trustee, but in favor of

preserving the equitable title of the mortgagor. [Spain v. Hines, 214

N.C. 432, 200 S.E. 25 (1938); Sprouse v. North River Ins. Co., 81

N.C. App. 311, 344 S.E.2d 555 (1986).]

B. Notice of hearing. [G.S. § 45-21.16]

1. Foreclosure is initiated by the filing of a notice of hearing by the

trustee, which is the equivalent of filing a petition and issuance of a

summons in a special proceeding.

a) Generally, the trustee contacts the clerk’s office to get a date

for the hearing, then files a notice of hearing with the clerk

and serves copies on all parties.

b) The clerk sets up the special proceeding case file and collects

the costs under G.S. § 7A-308(a)(1) at the time of the filing

of the notice of hearing.

2. Notice of hearing must be filed with the clerk and then served on all

proper persons. [G.S. § 45-21.16(a)]


130.7

3. Although not a statutory requirement, the notice of hearing may be

accompanied by a separate document, usually a petition or motion

seeking an order to serve and/or authorization to sell.

4. If property is located in more than one county, only one hearing is

necessary but the trustee must file a notice of hearing in all counties

where a portion of the property is located.

a) Since notices required to be filed in the foreclosure must be

filed in the clerk’s office in the same manner as special

proceedings, the clerk in each county where a notice of

hearing is filed should create a special proceedings case file,

collect the costs, and index the case.

5. Who must be served.

a) Any person to whom the deed of trust itself directs notice be

sent in case of default. [G.S. § 45-21.16(b)(1)]

b) Any person obligated to pay indebtedness against whom the

holder intends to assert liability. [G.S. § 45-21.16(b)(2)]

(1) A person obligated to pay indebtedness who fails to

receive proper notice of foreclosure hearing not

liable for any deficiency remaining after the sale.

[G.S. § 45-21.16(b)(2)]

(2) Example. A, B, and C are primarily obligated on the

note. D is obligated as a guarantor. However, the

trustee serves notice of hearing on A, B, and C only.

Trustee does not have to give notice to D unless the

trustee intends to assert liability against D for any

unpaid portion of indebtedness after foreclosure.

(3) If a person obligated to pay the indebtedness has not

been given notice, the clerk may, but has no

obligation to, inquire whether trustee intends to

assert liability against that person.

c) Every record owner of the real estate whose interest is of

record in the county where the real property is located at the

time the notice of hearing is filed in that county. [G.S. § 45-

21.16(b)(3)]

(1) “Record owner” means any person owning a present

or future interest in the real property, which interest

is of record at the time that the notice of hearing is

filed and would be affected by the foreclosure

proceeding.

(a) “Record owner” is intended to refer to either

the original mortgagor of the property or a

present owner who has purchased the

property subject to a mortgage. [Seashore

Properties, Inc. v. East Federal Savings and


130.8

Loan Association, 47 N.C. App. 675, 267

S.E.2d 693 (1980) (recording with the

register of deeds of management agreement

that specified management company was to

receive 50% interest in real and personal

property as compensation for its services did

not entitle management company to notice

of foreclosure).]

(2) A tenant in possession under an unrecorded lease or

rental agreement is not a record owner. (Note,

however, that tenants must be served with a notice of

sale of the property. [G.S. § 45-21.17(4)])

(3) The trustee in a deed of trust or the owner or holder

of a mortgage, deed of trust, judgment, mechanics or

materialman’s lien or other security interest in real

property is not included in the definition of record

owner.

(4) Persons taking as heirs or devisees are not record

owners unless a personal representative has qualified

in the county where the real estate is located or a

will has been probated in that county. However,

because G.S. § 28A-15-2(b) provides that title to

real property is vested in the heirs/devisees as of the

time of death and upon probate of a will, title is

vested in the heirs/devisees and relates back to

decedent’s death, a trustee who does not give notice

to heirs or devisees is creating a situation where the

foreclosure could be set aside later when

heirs/devisees discover the foreclosure or where the

prospective purchaser who discovers the death will

refuse to purchase because the current owners were

not given notice. [Collins v. R.L. Coleman & Co.,

262 N.C. 478, 137 S.E.2d 803 (1964) (attempted

foreclosure of tax lien on property listed in name of

dead person, when neither notice of the listing nor of

the foreclosure has been given to heirs who are the

true owners, is void; in that case taxes being

foreclosed had accrued on property after death of

owner; and heirs had not complied with requirement

to list property for taxes).]

d) Decedents’ estates. Although not “a record owner” unless

the decedent’s will is probated and devises real property to

the estate, the personal representative of a decedent’s estate

should be made a party because he or she is a potential

record owner with the right to bring a special proceeding

under G.S. § 28A-15-1(c) and § 28A-17-1 to sell the

property to pay debts of the estate.


130.9

6. Time for service. Notice of hearing must be served at least 10 days

prior to the date of the hearing. However, if the trustee is relying on

posting for service, the notice must be posted at least 20 days prior to

the date of the hearing. [G.S. § 45-21.16(a)]

7. Manner of service.

a) Debtor must be given personal notice of foreclosure hearing

in the manner prescribed by G.S. § 45-21.16(a). Actual

notice to debtor does not substitute for proper service upon

debtor. [PMB, Inc. v. Rosenfeld, 48 N.C. App. 736, 269

S.E.2d 748 (1980) (mortgagee sent letter and telephoned

mortgagor); but see Fleet Nat’l Bank v. Raleigh Oaks Joint

Venture, 117 N.C. App. 387, 451 S.E.2d 325 (1994) (court

refused to allow defense of improper service by publication

when party had actual notice and did not attend foreclosure

hearing, did not appeal clerk’s order, and waited 22 months

after hearing to object to service).]

b) Notice may be served:

(1) In any manner provided by Rules of Civil Procedure

for service of summons. [G.S. § 45-21.16(a)] Rule

4(j)(1) of the Rules of Civil Procedure (G.S. § 1A-1,

Rule 4) permits service on a natural person in the

following manner:

(a) By delivering a copy to the person.

(b) By leaving the notice at the person’s

dwelling house or usual place of abode with

a person of suitable age and discretion who

also resides in the dwelling.

(c) By delivering a copy to an agent authorized

by appointment or by law to be served or to

accept service of process on the person.

(d) By mailing a copy by registered or certified

mail, return receipt requested, addressed to

the party to be served, and delivering to the

addressee.

(e) By depositing with a designated delivery

service authorized by 26 U.S.C. §

7502(f)(2), addressed to the party to be

served, delivery to the addressee, and

obtaining a delivery receipt. (“Delivery

receipt” can include an electronic or

facsimile receipt.)


130.10

(f) By mailing a copy by signature confirmation

as provided by the United States Postal

Service, addressed to the party to be served,

and delivering to the addressee.

(2) By posting notice on the property in a conspicuous

place and manner not less than 20 days prior to the

date of the hearing, in those instances in which

service by publication would be authorized under the

Rules of Civil Procedure. See subsection c) below.

[G.S. § 45-21.16(a)] Rule 4(j1) of the Rules of Civil

Procedure governs service by publication.

c) Service by posting.

(1) A party who cannot be served by personal delivery,

registered or certified mail, or designated delivery

service after a reasonable and diligent effort may be

served by posting. [G.S. §§ 45-21.16(a); 1A-1, Rule

4(j1)]

(a) Due diligence requires the plaintiff to use all

resources reasonably available to attempt to

locate a party. [Williamson v. Savage, 104

N.C. App. 188, 408 S.E.2d 754 (1991);

Fountain v. Patrick, 44 N.C. App. 584, 261

S.E.2d 514 (1980).] “Reasonableness” does

not, however, require a party to explore

every possibility of ascertaining the person’s

location. [Jones v. Wallis, 712 S.E.2d 180

(N.C. App. 2011).]

(b) Where the information necessary for proper

service is either known or can with due

diligence be ascertained, service by

publication (posting in foreclosures) is

improper. [Jones v. Wallis, 712 S.E.2d 180

(N.C. App. 2011); Agbemavor v. Keteku,

177 N.C. App. 546, 629 S.E.2d 337 (2006).]

(c) The trustee must check public records to

determine the whereabouts of a party to be

served. [Jones v. Wallis, 712 S.E.2d 180

(N.C. App. 2011); Williamson v. Savage,

104 N.C. App. 188, 408 S. E.2d 754

(1991).]

(d) But the trustee need not undertake other

means of service before posting when it

would be futile to do so. [Cf. County of

Wayne ex rel. Williams v. Whitley, 72 N.C.

App. 155, 323 S.E.2d 458 (1984); McCoy v.


130.11

McCoy, 29 N.C. App. 109, 223 S.E.2d 513

(1976).]

(e) A sole attempt at personal service by

sending certified letter to business address

does not constitute a reasonable and diligent

search. [Barclays Am. Mortgage Corp. v.

BECA Enter., 116 N.C. App. 100, 446

S.E.2d 883 (1994).]

(2) Notice by posting on property will suffice only when

supplemented by notice mailed to party’s last known

address. Notice by posting on property without also

mailing notice is sufficient only in instances where

the party’s name and address are not reasonably

ascertainable. [Mennonite Bd. of Missions v. Adams,

462 U.S. 791, 77 L. Ed.2d 180, 103 S. Ct. 2706

(1983); Federal Land Bank v. Lackey, 94 N.C. App.

553, 380 S.E.2d 538 (1989), aff’d, 326 N.C. 478,

390 S.E. 2d 138 (1990).]

(3) Posting must be done by the sheriff, not the trustee.

[G.S. § 45-21.16(a)]

(4) The trustee proves service by filing an affidavit

showing posting, the circumstances warranting

service by posting and the efforts made to obtain

actual service as well as information, if any,

regarding the location of the party served. [G.S. §

1A-1, Rule 4(j1); G.S. § 1-75.10(a)(2); see also 45-

21.33(c)(2)(requirements for final report of sale)]

d) The twenty-day period for posting may run concurrently

with any other effort to effect service. [G.S. § 45-21.16(a)]

(1) The trustee may desire to post and mail notice to last

known address at same time as attempting other

forms of service, and to schedule hearing

accordingly.

(2) Although this provision would seem to conflict with

the requirement to make a reasonable and diligent

effort before posting is authorized, the diligent effort

may be made at the same time as the posting.

[McArdle Corp. v. Patterson, 115 N.C. App. 528,

445 S.E.2d 604 (1994), aff’d per curiam, 340 N.C.

356, 457 S.E.2d 596 (1995).]

(3) However, there is some question as to whether

service by posting is valid if the address is

ascertainable and the trustee does not make more

than one attempt to serve the party under Rule 4(j).


130.12

[Barclays Am. Mortgage Corp. v. BECA Enter., 116

N.C. App. 100, 446 S.E.2d 883 (1994).]

e) Whether due diligence has been exercised when a party has

been served by posting is an important judicial determination

that the clerk must make before authorizing the foreclosure

to proceed.

(1) There is no set formula that can be applied to make

that determination. The clerk must look at the

circumstances in each case and apply the law

regarding due and diligent effort to that case. [Jones

v. Wallis, 712 S.E.2d 180 (N.C. App. 2011); Barnes

v. Wells, 165 N.C. App. 575, 599 S.E.2d 585 (2004);

Emanuel v. Fellows, 47 N.C. App. 340, 267 S.E.2d

368 (1980) (“There is no “restrictive, mandatory

checklist for what constitutes due

diligence.…Rather, a case-by-case analysis is more

appropriate.”)

(2) Although the safest practice for the trustee would be

to attempt every type of servicehave the sheriff

attempt to serve the parties personally; mail a

certified letter, return receipt requested, or by

designated delivery service or signature

confirmation to the parties; have the sheriff post the

notice on the premises; and mail a copy to the party

at his or her last known address by first class

mailthat is not an absolute requirement.

(3) It is important that the trustee indicate the steps

taken to locate the respondent.

8. Contents of notice. [G.S. § 45-21.16(c), (c2)]

a) Notice of hearing is required by G.S. § 45-21.16 to be in

writing and contain the following information:

(1) Description of the property, which identifies the

secured real estate, including date of execution of

security agreement, original amount of debt, original

holder of note, and book and page of security

instrument.

(2) Name and address of the holder of the security

instrument at time notice of hearing is filed.

(3) Nature of the claimed default.

(4) Fact that secured creditor has accelerated the

maturity of the debt (if appropriate).

(5) Any right of debtor to pay the indebtedness or cure

default.


130.13

(6) That the holder has confirmed in writing to the

person giving the notice (or if holder is giving notice

confirms in the notice) that within 30 days of the

date of the notice, debtor was sent by first-class mail

to debtor’s last known address a detailed written

statement of amount of principal, interest, and any

other fees, expenses, and disbursements that the

holder in good faith is claiming to be due as of the

date of the written statement, and the daily rate of

interest based on contract rate. (The person giving

notice, if other than holder, can rely on written

confirmation and is not liable for inaccuracies. [G.S.

§ 45-21.16(c1)].)

(7) To the knowledge of the holder or servicer acting for

the holder, whether any requests for information

about the home loan pursuant to G.S. § 45-93 have

been made by the borrower within two years

preceding the date of the statement, and, if so,

whether they have been complied with. (The person

giving notice, if other than holder, can rely on

written confirmation and is not liable for

inaccuracies. [G.S. § 45-21.16(c1)].)

(8) The right of the debtor (or other party served) to

appear before clerk at hearing (time and date

specified) and be given an opportunity to show

cause why foreclosure should not be allowed. This

notice must state that:

(a) That debtor who does not contest creditor’s

allegations need not appear at hearing, but

debtor’s rights to pay indebtedness (to

prevent sale) or to attend sale is not affected

by not attending hearing.

(b) The trustee is a neutral party and may not

advocate for the secured creditor or for the

debtor in the foreclosure proceeding.

(c) The debtor has the right to apply to a judge

of superior court pursuant to G.S. § 45-

21.34 to enjoin the sale on any legal or

equitable ground prior to the time that the

rights of the parties to the sale become fixed.

(d) The debtor has the right to appear at the

foreclosure hearing and contest the evidence

that the clerk is to consider under G.S. 45-

21.16(d), and that to authorize the

foreclosure, the clerk must find the existence


130.14

of (i) a valid debt of which the party seeking

to foreclose is the holder; (ii) default; (iii)

right to foreclose under the instrument; and

(iv) notice to those entitled to notice.

(e) If the debtor fails to appear at the hearing,

the trustee will ask the clerk for an order to

sell the property being foreclosed.

(f) The debtor has a right to seek the advice of

an attorney and that free legal services may

be available to the debtor by contacting

Legal Aid of North Carolina or other legal

services organizations.

(9) If foreclosure sale is consummated, the purchaser

will be entitled to possession of the real estate as of

the date the deed is delivered, and debtor can be

evicted (order for possession) if debtor is still in

possession.

(10) Name, address, and telephone number of trustee or

mortgagee.

(11) Debtor should notify trustee or mortgagee in writing

of debtor’s current address to receive notice of all

proceedings related to the foreclosure.

(12) If the notice of hearing is intended to serve also as a

notice of sale, such additional information as is set

forth in G.S. § 45-21.16A.

(Notice of hearing may also include information

required in notice of sale. Although usually separate,

the notice of hearing and notice of sale may be

combined, but the additional information required

for the notice of sale must be included in the notice

of hearing. [G.S. § 45-21.16(c)(10)].)

(13) The party will be notified of any change in hearing

date. [G.S. § 45-21.16(c)]

(14) That if the debtor is currently on military duty the

foreclosure may be prohibited by G.S. § 45-21.12A.

(15) Home loan notification. Currently set to expire

May 31, 2013: A certification that the loan in

question is not a home loan (loan to natural person

for personal or family dwelling) or if a home loan, a

certification by the filing party that the pre-

foreclosure notice and information (required by G.S.

§§ 45-102 and -103) were provided in all material

respects and that periods of time established under

Emergency Program to Reduce Home Foreclosures


130.15

Act (G.S. Chapter 45, Article 11) have elapsed.

[G.S. § 45-21.16(c2)]

b) If any of the required information listed above is set forth in

a petition, notice of sale, or motion seeking an order to serve

or authorization to sell rather than in the notice of hearing, it

should be incorporated by reference into that petition, notice

of sale or motion attached and served along with the notice

of hearing in order to comply with G.S. § 45-21.16(c).

c) Posted notice is notice to world and need not contain the

names of the parties entitled to notice. [McArdle Corp. v.

Patterson, 115 N.C. App. 528, 532, 445 S.E.2d 604 (1994).]

C. Waiver of notice and waiver of hearing. [G.S. § 45-21.16(f)]

1. Waiver may not be made by an instrument signed at the time of the

loan.

2. In case of secured indebtedness of $100,000 or more, any person

entitled to notice and hearing may waive after default the right to

notice and hearing by a signed and acknowledged written instrument.

3. In all other cases, the clerk has discretion to dispense with a hearing

and issue an order authorizing sale if all of the following conditions

of waiver have been met:

a) Parties must be served with notice of hearing; and

b) After service, at the request of the trustee or mortgagee, the

clerk must mail to all parties entitled to notice and hearing a

form prepared by the trustee by which party may waive

rights to hearing; and

c) The parties must sign the forms, each witnessed by a person

who is not an agent or employee of the trustee or mortgagee,

and return them to the clerk.

The clerk’s recital and findings authorizing foreclosure should

indicate the parties’ waiver of the hearing.

4. A party does not waive the right to a hearing by not appearing.

5. Party’s presence and willing participation at hearing constitutes

waiver of notice. [In re Norton, 41 N.C. App. 529, 255 S.E. 2d 287

(1979).]

a) This is consistent with personal jurisdiction statute G.S. § 1-

75.7, which codified long-standing rule in North Carolina

that person making a voluntary appearance is subject to the

court’s jurisdiction irrespective of whether he or she has

been properly served unless an objection to service is raised

at the outset.

b) Virtually any action other than a motion to dismiss for lack

of jurisdiction will constitute a general appearance in a court


130.16

having subject matter jurisdiction. [Jerson v. Jerson, 68 N.C.

App. 738, 315 S.E.2d 522 (1984).]

6. Consent judgment allowed only under circumstances authorizing

waiver of notice and/or hearing as described above.

D. Continuance of hearing. [G.S. § 45-21.16(a)]

1. Clerk must continue the hearing if any of the parties has not been

served at least 10 days before the hearing (or if served by posting at

least 20 days before the hearing). A person who appears at the

hearing without objecting to the service waives the right to have 10

days’ notice.

2. The continuance must be made to a date and time certain, not less

than 10 days from the date of the original (or last) hearing date.

3. Clerk may also grant a continuance of hearing “for good cause” like

any other proceeding before the clerk.

a) If there is a reasonable opportunity to resolve the

foreclosure, the clerk must grant a continuance. See section

III.F at page 130.18.

b) The trustee is likely to object to a request for a continuance

by the debtor because a continuance may require

rescheduling of the date of sale and readvertising. However,

the clerk may disregard that concern when there is good

cause to grant a continuance.

c) Nonetheless, the clerk should keep in mind that, unlike many

other cases, in a foreclosure the lender’s damages continue to

increase until the foreclosure sale is held.

4. Notices already timely served remain effective. Each party already

timely served must be given notice of the date of the hearing by first-

class mail to his or her last known address.

E. Hearing procedure. [G.S. § 45-21.16(d)]

1. The hearing must be held before the clerk in a county where the land

(or any part thereof) is situated. Only one hearing is held when the

property is located in more than one county. However, trustee must

file the notice of hearing in all counties where the land is also

situated.

2. Hearing is limited to determination of the specific issues upon which

the clerk must base an order. [In re Carter, 725 S.E.2d 22 (N.C. App.

2012); Phil Mechanic Constr. Co. v. Haywood, 72 N.C. App. 318,

325 S.E.2d 1 (1985).] The trustee must present sufficient evidence on

all of the issues even if the debtor does not appear: As of August

2012, the following six determinations were required:

a) Noticeproper notice of the hearing given to those entitled

to it. (See subsections III.B at page 130.6 and III.H.1 at page

130.19 regarding notice requirements.)


130.17

b) Right to foreclosecreated by express power of sale in the

instrument itself. (See subsection III.H.2 at page 130.20.)

c) Valid debtheld by party seeking foreclosure through

trustee. (See subsection III.H.3 at page 130.21.)

d) Defaultby debtor/trustor. (See subsection III.H.4 at page

130.26.)

e) Military service—debtor is not in active duty military

service. (See section III.H.5 at page 130.26.)

f) Home loan status—not a home loan or requirements related

to a home loan have been met. (See section III.H.6 at page

130.27.) This provision is set to expire May 31, 2013.

3. Generally, it is a good practice for clerk at the beginning of a hearing

to indicate to the debtor that the purpose of the hearing is only to

determine the issues set forth above; that the clerk can consider only

evidence about these issues; and if the debtor wishes to raise issues

of equity or fairness or to raise other legal issues, the debtor can do

so by filing a lawsuit in superior court to enjoin the foreclosure

pursuant to G.S. § 45-21.34.

4. A trustee may not assume an advocacy role for either side in a

contested hearing.

a) In an uncontested hearing, the trustee may introduce

evidence for the lender.

b) If the trustee has anticipated an uncontested hearing and the

debtor raises defenses to the issues before the clerk, the clerk

must continue the hearing until an attorney for the lender

appears.

5. Clerk must swear in any witnesses who testify at the hearing.

6. Clerk may consider evidence presented by parties, affidavits, and

certified copies of documents.

a) Evidence typically includes affidavits from the holder and

owner of the deed of trust, loan officer and trustee, and the

original note and deed of trust.

b) A photocopy of the original note and deed of trust is

acceptable where there is no dispute, supported by

competent evidence, that the copy is a true and accurate

representation of the original. [Dobson v. Substitute Trustee

Svcs, Inc., 711 S.E.2d 728 (N.C. App. 2011), aff’d per

curiam, 365 N.C. 304, 716 S.E.2d 849 (2011); In re Adams,

204 N.C. App. 318, 693 S.E.2d 705 (2010); In re Helms, 55

N.C. App. 68, 284 S.E.2d 553 (1981).]

c) In a contested hearing, if an objection (hearsay) is made to

an affidavit, the clerk may continue the hearing and, upon


130.18

request, issue a subpoena for a witness to be available for

cross-examination.

7. Waiver of notice of hearing and waiver of hearing are not authorized

except as permitted by G.S. § 45-21.16(f). (See subsection III.C at

page 130.15.)

F. Opportunity to resolve foreclosure. [G.S. § 45-21.16C]

1. At the beginning of the hearing, the clerk must inquire as to whether

the debtor occupies the real property as his or her principal

residence. If so, the clerk must inquire about efforts the mortgagee,

trustee, or loan servicer has made to communicate with the debtor

and attempt to resolve the matter. However the clerk need not inquire

if the mortgagee or trustee has submitted an affidavit describing any

efforts taken to resolve the default and the results of those efforts.

2. The clerk must order the hearing continued if the clerk finds that

there is good cause to believe that additional time or measures have a

reasonable likelihood of resolving the delinquency without

foreclosure.

3. In making the determination, the clerk may consider whether:

a) The mortgagee, trustee or loan servicer has offered the

opportunity to resolve the foreclosure through a commonly

accepted resolution plan;

b) The mortgagee, trustee or loan servicer has engaged in actual

responsive communication with the debtor;

c) The debtor has indicated that he or she has the intent and

ability to resolve the delinquency by making future

payments under a resolution plan; and

d) The initiation or continuance of good faith voluntary

resolution efforts may resolve the issue without foreclosure.

4. If the clerk finds that good cause exists, the clerk must continue the

hearing to a date not more than 60 days from the date scheduled for

the original hearing.

G. Clerk to suspend proceedings upon notification by Commissioner of Banks.

1. If the Commissioner of Banks has evidence that a material violation

of law has occurred in the origination or servicing of a loan then

being foreclosed or then delinquent and in threat of foreclosure, and

that the putative violation would be sufficient in law or equity to

base a claim or affirmative defense that would affect the validity or

enforceability of the underlying contract or the right to foreclose,

then the Commissioner may notify the clerk of superior court. [G.S.

§ 53-244.117, which replaced G.S. § 53-243.12(n) by S.L. 2009-

374.]

2. The clerk must suspend the foreclosure proceeding for 60 days from

the date of notice. [G.S. § 45-21.16B]


130.19

3. If the suspension order is entered before the hearing, the trustee may

proceed to hearing after the 60-day suspension period by providing

at least 10 days’ written notice of the hearing to all parties.

4. If the suspension of proceedings is ordered after entry of order

authorizing foreclosure but before expiration of 10-day upset bid

period, when the 60-day period expires the trustee does not have to

have a new hearing and foreclosure order, but must give a notice of

sale as required by G.S. §§ 45-16A, -21.17, and -21.17A.

H. Issues determined at hearing. [G.S. § 45-21.16(d)]

1. Notice properly given to those persons entitled to receive it.

a) The notice must comply with G.S. § 45-21.16(c). (See

subsection III.B at page 130.6 for notice requirements.)

b) The trustee must also comply with additional notice

requirement of the instrument. The clerk should check the

deed of trust for such terms, especially with regard to any

additional persons entitled to notice and any required notice

of acceleration.

c) The clerk should make sure that all of the parties have been

served at least 10 days prior to the date of hearing, or, if

served by posting, at least 20 days prior to the date of

hearing.

(1) A party who was given notice less than 10 days

before the hearing, but who is present at the hearing

waives the right to 10 days’ notice by not objecting.

[In re Norton, 41 N.C. App. 529, 255 S.E.2d 287

(1979) (party’s presence and willing participation at

hearing constitutes waiver of notice).]

d) If all parties have not been served in time to hold the

hearing, the clerk shall order it continued to date and time

certain not less than 10 days from the date scheduled for

original hearing. [G.S. § 45-21.16(a)]

(1) All notices already timely served remain effective.

[G.S. § 45-21.16(a)]

(2) Trustee must satisfy notice requirements with

respect to those not served or not timely served with

respect to the original hearing. [G.S. § 45-21.16(a)]

(a) In addition to giving notice of the continued

hearing pursuant to Rule 4 to those not

served before the original hearing, the

trustee must also give notice of the

continued hearing pursuant to Rule 4 to

those not timely served before the original

hearing; in other words, to persons served

by a method other than posting less than 10


130.20

days before the original hearing or by

posting less than 20 days before the hearing

date.

(b) Example. A foreclosure is initiated against

A, B, C, D, and E. The notice of hearing sets

the date of hearing for February 15. The

sheriff serves A personally on February 1

and B on the same date by leaving a copy of

the notice at B’s dwelling with a person of

suitable age and discretion who also resides

there. The sheriff serves C by posting a copy

of the notice on the premises on February 1

(i.e., less than 20 days before the hearing

date). The sheriff serves D personally on

February 10 and does not serve E. Neither C

nor D waives the requirement for 10-day

notice. The clerk continues the hearing until

March 1. The trustee must give notice of the

March 1 hearing pursuant to Rule 4 to C and

D as well as to E.

(3) Any party timely served who has not received actual

notice of the date to which hearing has been

continued must be notified of the continuance order

by first class mail to last known address. [G.S. § 45-

21.16(a)] In practice, the trustee sends the notice.

e) Clerk erred in permitting foreclosure sale where debtor was

not given notice as prescribed by G.S. § 45-21.16(a);

debtor’s actual knowledge of hearing was irrelevant. [PMB,

Inc. v. Rosenfeld, 48 N.C. App. 736, 269 S.E.2d 748 (1980)

(letter to and telephone conversation with debtor

insufficient).]

f) Notice dated December 8, 1978 not fatally defective, even

though indicated date of hearing was January 3, 1978 rather

than 1979. [Lovell v. Rowan Mut. Fire Ins. Co., 46 N.C.

App. 150, 264 S.E. 2d 743, rev’d on other grounds, 302

N.C. 150, 274 S.E.2d 170 (1981).]

2. Right to foreclose under deed of trust.

a) This right is evidenced by terms of instrument itself.

b) Clerk should make sure that substituted trustee initiating

foreclosure has authority to exercise the power of sale. (See

section II.B at page 130.4 regarding substitution of trustee.)

There must be a written document recorded with the register

of deeds before or contemporaneously with the initiation

of the proceeding, in other words before the filing of the

notice of hearing.


130.21

c) Clerk can find right to foreclose if there is competent

evidence that the terms of the deed of trust permit the

exercise of the power of sale under the circumstances of the

particular case. [In re Burgess, 47 N.C. App. 599, 267

S.E.2d 915 (1980).]

d) Release of part of the total property secured upon the making

of certain payments as provided in deed of trust is a defense

to the right to foreclose those portions of property released.

[In re Michael Weinman Assoc., 333 N.C. 221, 424 S.E.2d

385 (1993).]

e) Where a deed of trust was in the name of only one of the

joint tenants with right of survivorship, lender had right to

foreclose only ½ of the property secured by the loan. The

filing of the deed of trust (with register of deeds) in the name

of only one joint tenant was a conveyance, and thus severed

the right of survivorship, creating a tenancy-in-common in

which only half the property was encumbered. [Countrywide

Home Loans, Inc. v. Reed, 725 S.E.2d 667 (N.C. App.

2012).]

f) Where a condition precedent to the lender’s right to

foreclose (contained in the instrument) had not been met, the

clerk could not properly find a right to foreclosure. [In re

Deed of Trust by Goforth Properties, Inc. 334 N.C. 369, 432

S.E.2d 855 (1993).]

3. Valid debt held by party seeking foreclosure.

a) Two questions must be answered to satisfy this requirement:

(i) Is there sufficient competent evidence of a valid debt; and

(ii) is there sufficient competent evidence that the party

seeking to foreclose is the holder of the notes that evidence

the debt? [In re Adams, 204 N.C. App. 318, 693 S.E.2d 705

(2010) (citing Connolly v. Potts, 63 N.C. App. 547, 306

S.E.2d 123 (1983)).]

b) Valid debt.

(1) Usually the evidence of indebtedness is a promissory

note, but it may be other instrument of indebtedness

such as a criminal appearance bond.

(2) Clerk should examine the evidence of indebtedness.

(3) Introduction of the note along with evidence of its

execution and delivery, without probative evidence

to the contrary, will support a finding of valid debt.

[In re Cooke, 37 N.C. App. 575, 246 S.E.2d 801

(1978).]

(4) Photocopies. Certified photocopies of the note and

deed of trust are admissible as evidence of

indebtedness and are acceptable where there is no


130.22

dispute, supported by competent evidence, that the

copies are not true and accurate reproductions of the

originals. [Dobson v. Substitute Trustee Svcs, Inc.,

711 S.E.2d 728 (N.C. App. 2011), aff’d per curiam,

365 N.C. 304, 716 S.E.2d 849 (2011); In re Adams,

204 N.C. App. 318, 693 S.E.2d 705 (2010); In re

Helms, 55 N.C. App. 68, 284 S.E.2d 553 (1981).]

(a) Even though a copy is admissible, the

opposing party can object to its authenticity.

[G.S. § 45-21.16(d); G.S. § 8-45.1; G.S. §§

8C-1, Rules 1002-1004; In re Helms, 55

N.C. App. 68, 284 S.E.2d 553 (1981).]

(b) The clerk should permit the opposing party

to cross-examine such evidence and to

introduce contrary evidence.

(5) The fact that some amount of money is owed is

sufficient to show default; the amount of debt

outstanding is irrelevant and the clerk can find a

valid debt even if the amount is in dispute. [In re

Burgess, 47 N.C. App. 599, 267 S.E.2d 915 (1980).]

Example. Debtor’s argument that he only owes

$3,000 rather than the $4,000 does not stop clerk’s

finding of valid debt.

(6) Where property lies in two counties, payment of the

debt from a foreclosure sale in one county will

preclude a finding of valid debt in a foreclosure

proceeding subsequently brought in second county.

[In re Rollins, 75 N.C. App. 656, 331 S.E.2d 303

(1985).]

(7) Failure of consideration is a defense to valid debt.

[In re Aal-Anubiaimhotepokorohamz, 123 N.C. App.

133, 472 S.E.2d 369 (1996) (failure to execute

assignment of equipment that was the consideration

for the note); In re Kitchens, 113 N.C. App. 175,

437 S.E.2d 511 (1993) (criminal prosecution for

embezzlement when promise not to prosecute was

the consideration).]

c) Valid holder.

(1) Evidence must show that party seeking to foreclose

is holder of valid debt. [In re Adams, 204 N.C. App.

318, 693 S.E.2d 705 (2010); Connolly v. Potts, 63

N.C. App. 547, 306 S.E.2d 123 (1983).]

(2) Definition of “holder” in Uniform Commercial Code

(UCC) is applicable to term as it is used in

foreclosures under power of sale. [In re Adams, 204


130.23

N.C. App. 318, 322, 693 S.E.2d 705, 709 (2010);

Connolly v. Potts, 63 N.C. App. 547, 306 S.E.2d 123

(1983).]

(a) The Uniform Commercial Code (UCC)

defines “holder” as “the person in

possession of a negotiable instrument that is

payable to the bearer or to an identified

person…in possession.” [G.S. § 25-1-

201(b)(21)(a)]

(3) Evidence of “valid holder.”

(a) Possession of note.

(i) Possession of the note and deed of

trust is significant in determining

holder of valid debt, and absence of

possession defeats that status.

[Connolly v. Potts, 63 N.C. App.

547, 306 S.E.2d 123 (1983).]

(ii) Where note lost, destroyed, or

stolen, party seeking recovery based

on it must “prove the terms of the

instrument and the person’s right to

enforce the instrument.” [G.S. § 25-

3-309(b)]

(b) Evidence of transfer (chain of ownership).

(i) However, mere possession of note

by a party to whom the note has

neither been indorsed nor made

payable does not suffice to prove

ownership or holder status. [In re

Simpson, 711 S.E.2d 165 (N.C.

App. 2011); In re Adams, 204 N.C.

App. 318, 693 S.E.2d 705 (2010);

Econo-Travel Motor Hotel Corp v.

Taylor, 301 N.C. 200, 271 S.E.2d

54 (1980).]

(ii) The petitioner must present

competent evidence of transfer of

title by assignment, indorsement,

merger, or otherwise.

(a) In In re Simpson, 711

S.E.2d 165 (N.C. App.

2011), the court held that


130.24

the petitioner bank failed to

demonstrate it was the

current holder when it

introduced a note not

indorsed either to the

petitioner bank or to bearer.

(b) In In re Adams, 204 N.C.

App. 318, 693 S.E.2d 705

(2010), the court held

evidence not sufficient to

show bank was holder when

photocopies of note and

deed of trust introduced into

evidence indicated original

holder but did not indicate

that original holder indorsed

or transferred the note to

company alleged to be

current holder and no other

evidence was offered to

show the transfer.

(c) Statement of “holder” in

affidavit not sufficient. In

In re Simpson, 711 S.E.2d

165 (N.C. App. 2011) and

In re Yopp, 720 S.E.2d 769

(N.C. App. 2011), the court

held that a statement in a

bank’s affidavit that it was

the “owner and holder” of a

note was not sufficient

competent evidence of valid

holder. The statement in the

affidavit was merely a

statement of the ultimate

legal conclusion, not actual

evidence to support that

conclusion.

(d) Merger. Competent

evidence that a bank has

merged with the prior valid

holder typically is sufficient

to show that that party is the

current valid holder. The

new holder succeeds by

operation of law (G.S. 55-

11-06(a)(2)) to the prior


130.25

holder’s status. [In re

Carver Pond, 719 S.E.2d

207 (N.C. App. 2011).]

(i) Where a bank put

forth an affidavit

testifying to the

merger; a certified

statement from the

bank’s assistant

secretary as to the

merger; and a letter

by the Comptroller

of the Currency

certifying the

merger had

occurred, the bank

proffered sufficient

competent evidence

of merger. [In re

Carver Pond, 719

S.E.2d 207 (N.C.

App. 2011).]

(ii) Printouts from the

Web sites of the

FDIC, Federal

Reserve, and US

National

Information Center

showing merger

were not competent

evidence of merger.

Merely printing

information from

the internet does not

endow it with “any

authentication

whatsoever.” [In re

Yopp, 720 S.E.2d

769 (N.C. App.

2011).]

(iii) For a further discussion of the need

for evidence of assignments or

indorsements, see Appendix II at

page 130.58.

4. Default by debtor on obligation.


130.26

a) Default on the underlying obligation most frequently occurs

when there is a failure to pay installments as they become

due.

(1) Where modification agreement provided that lender

could accelerate debt if payments became

delinquent, court properly found delinquency where

payment was one day late. [In re Fortescue, 75 N.C.

App. 127, 330 S.E.2d 219 (1985).]

b) Default can also arise from failure to provide insurance,

failure to pay taxes, or any other default in an obligation

created by the instrument.

(1) Conveyance of secured property without lender’s

consent as provided by deed of trust that contained

due-on-sale clause constituted default. [In re Bonder,

55 N.C. App. 373, 285 S.E.2d 615, aff’d, 306 N.C.

451, 293 S.E.2d 798 (1982).]

c) Demand letter may be required by terms of deed of trust

before default can occur. Clerk may need to review deed of

trust to see if demand letter is required before default can be

found.

d) Default is usually shown by affidavit or testimony of holder

or owner of deed of trust (typically loan officer), together

with copies of the note and deed of trust. (See section II.A at

page 130.3 regarding role of trustee.)

(1) If deed of trust requires demand letter or specific

notice, affidavit should indicate that proper letter

was sent or notice given.

(2) Sometimes the trustee will provide a copy of the

note and deed of trust for the file although this is not

required.

5. Military service. [G.S. § 45-21.12A]

a) The power of sale is barred during a debtor’s period of

military service or within 90 days after the completion of

military service for deeds of trust that originated before the

debtor’s period of military service. [G.S. § 45-21.12A(a)] In

entering an order of sale, the clerk must make a written

finding that the power of sale is not barred by respondent’s

military service.

b) Definitions

(1) “Military service”

(a) For members of the Army, Navy, Air Force,

Marine Corps, or Coast Guard, active duty.

For National Guard, service under a call to


130.27

active service by the President or Secretary

of Defense for a period of more than 30

consecutive days for the purposes of

responding to a national emergency declared

by the President and supported by federal

funds.

(b) For servicemembers who are commissioned

officers of the Public Health Service or

National Oceanic and Atmospheric

Administration, active service.

(c) Any period during which a servicemember

is absent from duty on account of sickness,

wounds, leave, or other lawful cause. [G.S. §

45-21.12A(d)(1)]

(2) “Period of military service.” The period beginning

on the date on which a service member enters

military service and ending on the date on which the

service member is released from or dies while in

military service. [G.S. § 45-21.12A(d)(1)]

c) The clerk cannot hold a foreclosure hearing unless the

trustee or other creditor seeking to exercise a power of sale

files with the clerk a certification that the hearing will take

place at a time that is not during, or within 90 days after, a

period of military service for the debtor. [G.S. § 45-

21.12A(a)]

d) The debtor may waive his or her rights under this statute by

written instrument, separate from the note to which the

waiver applies, executed during or after period of military

service. The waiver must be in at least 12-point type and

must specify the debt instrument. [G.S. § 45-21.12A(b)]

e) G.S. § 45-21.12A supplements and complements the

Servicemembers Civil Relief Act, 50 U.S.C. App. § 501 et

seq. (“SCRA”). [G.S. § 45-21.12A(c)] Compliance with the

North Carolina statute does not, however, necessarily

constitute compliance with the SCRA. For more resources

on the SCRA, see the North Carolina State Bar Web site

(Clerks’ and Workers’ Guide to the SCRA and Military

Support Enforcement,

http://www.ncbar.com/lamp/other_publications.asp.)

6. Home loan status. Set to expire May 31, 2013.

a) The clerk must find that the underlying debt is:

(1) not for a home loan; or,

(2) if it is for a home loan, that the pre-foreclosure

notice required by G.S. § 45-102 has been provided

http://www.ncbar.com/lamp/other_publications.asp


130.28

in all material respects and the periods for extension

of the foreclosure process have passed. [G.S. § 45-

21.16(d)]

b) “Home loan” is a loan where the borrower is a natural

person, the debt is incurred primarily for personal, family or

household purpose, and the loan is to purchase a dwelling or

construct a dwelling for the borrower to occupy as his or her

principal dwelling. It does not include an equity line of

credit, a reverse mortgage, a construction loan, or specified

bridge loan. [G.S. § 45-101(1b)]

I. Defenses.

1. Only legal defenses that relate directly to negating the clerk’s

findings necessary to enter an order authorizing sale(i) valid debt,

(ii) default, (iii) right to foreclose, (iv) notice, (v) military service,

and (vi) (until May 31, 2013) home loan statusare properly

considered by the clerk at the hearing.

a) A debtor who asserts that he or she is not in default because

he or she has timely made all payments and otherwise met

all obligations under the note has asserted a legal defense

which must be considered by the clerk at the hearing.

b) Legal defenses that negate any of the requisite findings are

properly considered at the hearing, otherwise hearing would

be “purposeless formality.” [In re Bonder, 55 N.C. App. 373,

aff’d, 306 N.C. 451, 293 S.E.2d 798 (1982) (validating “due-

on-sale” clauses in deeds of trust on residential property).]

c) Amount outstanding on debt is not relevant to foreclosure

proceeding, but will be relevant to equitable action to enjoin

sale. [In re Burgess, 47 N.C. App. 599, 267 S.E.2d 915

(1980).]

d) Defense that property has been released as security under

provision in deed of trust is legal defense. [In re Foreclosure

of Michael Weinman Assoc., 333 N.C. 221, 424 S.E.2d 385

(1993).]

2. Equitable defenses as well as other legal arguments not related to

the findings necessary to enter an order authorizing sale must not be

considered by the clerk at the hearing (or by the judge on appeal).

a) If debtor asserts, for example, that he or she was not aware

that he or she was in default, or that there is good cause for

not making timely payments, the debtor has asserted an

equitable defense which cannot be considered by the clerk.

Or if the debtor is angry with the lender for its debt

collection practices, the debtor has asserted an equitable

defense. Such defense may only be considered by a judge in

a separate action or proceeding brought to enjoin the sale


130.29

pursuant to G.S. § 45-21.34. (See section XIII.A at page

130.52.)

(1) If debtor raises an equitable defense, the clerk may

want to explain that such defense is not an issue for

the foreclosure hearing but can be raised in an action

to enjoin the foreclosure pursuant to G.S. § 45-

21.34.

b) To invoke equity jurisdiction to enjoin foreclosure for any

reason, parties must initiate a separate civil action in superior

court [CVS case] under G.S. § 45-21.34. [In re Carter, 725

S.E.2d 22 (N.C. App. 2012); Golf Vistas, Inc. v. Mortgage

Investors, 39 N.C. App. 230, 249 S.E.2d 815 (1978).]

c) Finding by the court that the debtors were unaware of

significance and importance of making payments on time

was beyond scope of hearing [before clerk] under G.S. § 45-

21.16. [In re Watts, 38 N.C. App. 90, 247 S.E.2d 427

(1978).]

d) It was improper for the trial court to consider the equitable

doctrine of merger of title in an appeal of the clerk’s order of

sale. [Mosler ex rel. Druid Hills Land Co. Inc., 199 N.C.

App. 293, 681 S.E.2d 456 (2009).]

e) Whether lender had waived its right to prompt payment is an

equitable defense and should not be considered at hearing

(before clerk) under G.S. § 45-21.16. [In re Fortescue, 75

N.C. App. 127, 330 S.E.2d 219 (1985).] Where holder of

note repeatedly accepts monthly installment payments after

their due dates, the holder waived the right to insist on

punctual payment unless before late payment noteholder

notified payor that prompt payment is again required.

[Meehan v. Cable, 135 N.C. App. 715, 523 S.E.2d 419

(1999) (G.S. § 45-21.34 proceeding); Driftwood Manor

Investors v. City Fed. Sav. & Loan, 63 N.C. App. 459, 305

S.E.2d 204 (1983).]

f) Whether portion of the property sought to be foreclosed had

been released from the deed of trust by lender may also be

raised in action to enjoin foreclosure under G.S. § 45-21.34

as well as a defense in the foreclosure action. [Golf Vistas,

Inc. v. Mortgage Investors, 39 N.C. App. 230, 249 S.E.2d

815 (1978); In re Michael Weinman Assoc., 333 N.C. 221,

424 S.E.2d 385 (1993).]

g) Whether borrower was competent to execute a deed of trust

is an equitable defense. [In re Foreclosure of Godwin, 121

N.C. App. 703, 468 S.E.2d 811 (1996).]


130.30

IV. Clerk’s Findings and Order of Sale

A. If the clerk finds the existence of requisite issues set forth in G.S. § 45-

21.16(d) from the evidence presented, the clerk makes findings to that effect

and by order authorizes the trustee to proceed with a foreclosure sale under

the statute and deed of trust. [G.S. § 45-21.16(d)]

1. The clerk should make sure the findings address all the necessary

issues.

2. It is a good practice to make a statement of record as to whether the

debtor was present and whether there was a waiver of the hearing.

3. It is not good practice to make a finding as to any amount of money

that is owed, as that issue is not before the clerk.

B. If the clerk fails to find the existence of the requisite issues, the clerk makes

findings to that effect and by order denies the request to proceed with a

foreclosure sale.

C. If the clerk finds the existence of the necessary issues, the trustee usually

prepares an order of sale reciting that the clerk has made the requisite

findings and that trustee is authorized to proceed with foreclosure. If the

clerk fails to find the necessary issues, the clerk may ask the trustee to

prepare an order denying a request to proceed with foreclosure sale.

D. Following entry of the order of sale, the trustee can give notice of sale and

conduct a foreclosure sale under the statute and deed of trust. [G.S. § 45-

21.16(d)]

E. Trustee must file a certified copy of clerk’s order of sale in any other county

where a portion of the property is located before trustee may proceed with

sale of property located in that county.

V. Appeal From Order of Sale

A. Clerk’s order of sale is a judicial act and may be appealed within 10 days of

entry of the order of sale district or superior court judge having jurisdiction.

[G.S. § 45-21.16(d1)]

1. The clerk should ask the appellant to which court he or she is

appealing.

2. Under G.S. § 7A-243 the district court is the proper division for

cases in which the amount in controversy is $10,000 or less, and the

superior court is the proper division if the amount in controversy

exceeds $10,000, but either court can hear any appeal because the

amount is not jurisdictional.

B. Appeal is heard de novo. [G.S. § 45-21.16(d1)] The judge’s jurisdiction is

limited to determining the same issues as were before the clerk; equitable

defenses (and other legal issues) may not be considered. [Mosler ex rel.

Druid Hills Land Co. Inc., 199 N.C. App. 293, 681 S.E.2d 456 (2009); In re


130.31

Foreclosure of Helms, 55 N.C. App. 68, 284 S.E.2d 553 (1981); In re Watts,

38 N.C. App. 90, 247 S.E.2d 427 (1978).]

1. However, the appellant can file a civil action for equitable relief

under G.S. § 45-21.34 in superior court and that action can be

consolidated with an appeal from the clerk to superior court. [See

Driftwood Manor Investors v. City Fed. Sav. & Loan, 63 N.C. App.

459, 305 S.E.2d 204 (1983).]

C. Bond. [G.S. § 45-21.16(d1)] Clerk must set appeal bond to protect opposing

party from probable loss by reason of delay in the foreclosure.

1. Purpose. The purpose of bond is to protect the lender’s security

interest in the property until a judge hears the appeal. If bond is

posted, the clerk shall stay the foreclosure. If the lender appeals, the

purpose of the bond is to protect the debtor’s interest. Example.

Lender appeals; debtor had a contract to sell the land, and the

contract is cancelled because of foreclosure proceeding.

a) Courts have greater latitude in measuring damages under

G.S. § 45-21.16 than under G.S. § 45-21.34 or G.S. § 1-292.

[In re Simon, 36 N.C. App. 51, 243 S.E.2d 163 (1978).]

b) Length of appeal is time from appeal of clerk’s order to

hearing before judge. [Id.]

2. Amount of bond.

a) If the appealing party owns and occupies the property to be

sold as his or her principal residence, the bond shall be set in

the amount of 1% of the principal balance due on the note.

The clerk may, however, require a lesser amount in cases of

undue hardship or for other good cause shown. The clerk

may require a higher bond if there is a likelihood of waste or

damage to the property during the pendency of appeal or for

other good cause shown. [G.S. § 45-21.16(d1)]

b) In cases of foreclosure of property that is not debtor’s

principal residence or when setting a bond other than 1% in

foreclosure of debtor’s principal residence, the clerk must

consider different factors in setting the bond based on the

particular facts of the case.

(1) Examples of factors to consider when setting amount

for bond to stay foreclosure include: equity in

property; length of appeal; daily interest accruing on

note; lack of adequate hazard insurance; weather

conditions affecting partial construction; lack of

occupancy; or physical security of property.

(2) If in the particular case the amount of debt is

considerably lower than the fair market value of the

property and there is little risk of physical damage,

the clerk might set a minimal bond. Example.


130.32

Debtor defaults on a purchase money deed of trust

covering a vacation home with a fair market value of

$285,000 and no other liens against it. The amount

owed on the note is $58,000. Only a small bond is

necessary because the equity in the property

($227,000) is sufficient to cover the default and

interest until the appeal is heard.

(3) On the other hand, if there is a large debt

outstanding or the property is subject to vandalism

or other damage, the clerk may want to consider a

higher bond. Example. Debtor defaults on a loan

secured by a deed of trust covering a commercial

building that has a market value of $200,000. The

amount owed on the note is $180,000 and the

property is located in an area that has deteriorated in

the last few years. It is vacant and is subject to

frequent break-ins. In this case, the clerk would want

to consider the interest accruing on the indebtedness

during the pendency of the appeal and the likelihood

of vandalism in setting a more substantial bond since

the property itself is not likely to bring the full

amount owed. [In re Simon, above (either interest on

value of the land or interest accruing on

indebtedness during pendency of stay would be a

proper measure of damages under a bond to stay

foreclosure sale).]

D. Stay. When the bond is posted, the clerk must stay the foreclosure pending

appeal. [G.S. § 45-21.16(d1)]

1. If bond is not posted, trustee may proceed with foreclosure. [In re

Foreclosure of Coley Properties, Inc., 50 N.C. App. 413, 273 S.E.2d

738 (1981).]

2. Bond is not a condition of appeal; clerk may not dismiss the appeal

for failure to post bond. [In re Foreclosure of Coley Properties, Inc.,

50 N.C. App. 413, 273 S.E.2d 738 (1981); see also Radisi v. HSBC

Bank USA Nat’l Ass’n, 2012 WL 21555052, *4 (W.D.N.C. 2012)

(citing Coley Properties).]

3. The appeal itself is perfected by giving notice of appeal within 10

days after entry of the clerk’s order, and no additional costs are

assessed for appeal. [G.S. § 45-21.16(d1)] The bond is to stay the

execution of the clerk’s decision while the case is on appeal.

E. Time for hearing. Parties have a right to have the appeal heard promptly.

Either party may demand the matter be heard at the next succeeding term of

court convening 10 or more days after clerk’s hearing. [G.S. § 45-21.16(e)]

F. Trustee must file a certified copy of any order entered as result of appeal in

all counties where notice of hearing was filed. [G.S. § 45-21.16(e)]


130.33

VI. Procedure For Sale

A. Notice of sale.

1. Upon entry of order of sale, the trustee can give notice of sale and

proceed under the deed of trust. [G.S. § 45-21.16(d)]

2. The notice of sale must contain following information [G.S. § 45-

21.16A]:

a) Description of the instrument, by identifying the original

mortgagor(s), recording data, and the record owner (as

reflected on register of deeds records within 10 days prior to

posting notice), if different from the mortgagor;

b) Date, hour, and place of sale, which must be consistent with

the instrument and G.S. Chapter 45, Article 2A;

c) Description of the real property and improvements to be

sold;

d) Terms of the sale provided for by deed of trust, including

amount of cash deposit required of the highest bidder, if any;

e) Any other provisions required by the deed of trust;

f) Statement that the property will be sold subject to taxes or

special assessments, if applicable; and

g) Statement whether the property will be sold subject to or

together with identified subordinate interests.

3. In addition, if the sale is of residential property with less than 15

rental units, the notice of sale must also include the following

statements:

a) The clerk may issue an order for possession in favor of the

purchaser against the parties in possession, and

b) Any tenant occupying the premises, after receiving the

notice of sale, may terminate the lease upon 10 days’ written

notice to the landlord. Any tenant is liable, after termination,

for rent due, prorated to the date of termination.

4. The notice must be posted and published as required by the deed of

trust and according to G.S. § 45-21.17.

a) Notice of sale must be posted in the area designated by the

clerk for posting publications in the county in which the

property is situated, at least 20 days immediately preceding

sale. [G.S. § 45-21.17(1)a.]

b) Notice of sale must be published in a newspaper that is

published in and qualified for legal advertising in the county

in which the property is located, or, if none, in one having

general circulation in the county, once a week for two

successive weeks, at least 7 days apart (including Sundays)


130.34

and completed no more than 10 days preceding date of sale.

[G.S. § 45-21.17(1)b.]

(1) G.S. § 1-597 defines when a newspaper is qualified

for legal advertising and the statute must be applied

to G.S. § 45-21.17. [Haas v. Warren, 341 N.C. 148,

459 S.E.2d 254 (1995).]

(2) Legal notice is of no force and effect unless

published in a newspaper with a general circulation

to actual paid subscribers which newspaper was

admitted to the United States mail in the Periodicals

class in the county or political subdivision where the

land in question is situated. [G.S. § 1-597]

c) Clerk may, in the clerk’s discretion or on application of any

interested party, authorize additional advertising which in

the opinion of the clerk will serve the interest of the parties,

with costs paid as part of the cost of foreclosure. [G.S. § 45-

21.17(1)b.3.]

5. If the property is situated in more than one county, the trustee must

comply with notice of sale provisions above in each county in which

any part of property situated. [G.S. § 45-21.17(3)]

6. Trustee must mail a notice of sale by first class mail at least 20 days

before date of sale to all parties entitled to notice of the foreclosure

hearing whose address the trustee or mortgagee knows, and to any

party who has properly filed a request to receive notice of sale in

compliance with G.S. § 45-21.17A. [G.S. § 45-21.17(4)]

a) The owners at the time of giving notice of sale may be

different from those at the time of giving notice of the

hearing. If an owner has died since the notice of hearing, the

trustee should notify the heirs. The purpose of the notice of

sale is to promote as many potential bidders as possible to

protect all interests. A trustee who narrows the list of persons

to whom a notice of sale is provided risks having the

foreclosure set aside.

7. If the property is residential and contains less than 15 rental units, the

trustee must also mail a notice of sale to any person who occupies

the property under a lease. The notice must be addressed to the

person by name, if known, or, if not known, to “occupant” at the

address of the property to be sold. [G.S. § 45-21.17(4)] (If the tenant

has been sent notice of the foreclosure hearing containing the

information required by G.S. § 45-21.16A, notice of sale is not

required.)

8. If the deed of trust specifies a time period for giving the notice of

hearing or the notice of sale, those time periods may commence with

and run concurrently with the time periods for those notices specified

in the statute. [G.S. § 45-21.17(6)] However, the notice must run for


130.35

the longer period of time, whether that is the statutory time or the

time specified in the deed of trust.

B. Time and place of sale.

1. The sale must be conducted at the courthouse door of county in

which land is situated, except as follows:

a) When a single tract (with continuous boundary) is located in

two or more counties, the sale may be held in any one of the

counties in which tract is situated. [G.S. § 45-21.4(b)]

b) If the deed of trust designates a place of sale within county,

the sale is held at the designated place. [G.S. § 45-21.4(c)]

c) If the trustee is given the power in the deed of trust to

designate a place of sale, the place shall be either on the

premises to be sold or at the courthouse door in a county

where the property situated. [G.S. § 45-21.4(d)]

2. The sale must take place between 10:00 A.M. and 4:00 P.M. on any

day except Sunday or a legal holiday when the courthouse is closed

for transactions. [G.S. § 45-21.23]

3. The sale must begin at the designated time and place except that a

delay of up to one hour, or a delay caused by other sales at same

place, is permitted. [G.S. § 45-21.23]

C. Postponement of sale. [G.S. § 45-21.21]

1. A sale may be postponed by the person exercising the power of sale

to a date certain not later than 90 days (exclusive of Sunday) after the

original date of sale, when:

a) There are no bidders;

b) Number of prospective bidders is substantially decreased by

inclement weather or any casualty;

c) So many other sales are scheduled as to make it inexpedient

or impracticable to hold the sale;

d) Trustee is unable to hold sale because of illness or other

good reason; or

e) Other good cause exists. [G.S. § 45-21.21]

f) Sale may be postponed more than once provided final

postponed date is not later than 90 days after original sale

date. If the 90th day is a Sunday or a legal holiday when the

courthouse is closed for transactions the sale may be

postponed to the next business day. [G.S. § 45-21.21(a), (e)]

(Note that G.S. § 45-21.21(a) provides that the sale cannot

be postponed to a Sunday while subsection (e) prohibits

postponement to a legal holiday as well as a Sunday.)

2. Procedure for postponement


130.36

a) Trustee (or the trustee’s agent or attorney) must publicly

announce the postponement at the time and place advertised

for sale. [G.S. § 45-21.21(b)(1)]

b) On the same day, the trustee (or the trustee’s agent or

attorney) must attach a notice of postponement to the

original notice of sale posted at the courthouse bulletin board

or note the postponement directly on the original notice.

[G.S. § 45-21.21(b)(2)]

(1) Posted notice of postponement must state that the

sale is postponed, the hour and date to which it is

postponed, the reason for postponement, and be

signed by a person authorized to hold the sale or that

person’s attorney or agent. [G.S. § 45-21.21(c)]

c) Trustee must also give notice of postponement (written or

oral) to each person entitled to notice of the sale under G.S.

§ 45-21.17. [G.S. § 45-21.21(b)(3)]

3. If the sale is not held at the time fixed and is not postponed as

required, or a postponed sale is not held at the time fixed or within

90 days of date originally fixed for sale, the trustee must comply

again with the provisions of notice of sale in G.S. § 45-21.16A, 45-

21.17, and 45-21.17A but need not comply with the provisions for

notice of hearing and hearing in G.S. § 45-21.16. [G.S. § 45-

21.21(d)]

a) Same requirements for re-notice apply if there is an appeal

and the appellate court orders the sale to be held.

b) Procedural protections for postponement are only for the

benefit of the debtor; a purchaser at an improperly postponed

sale cannot later claim that the sale was invalid. [Gore v.

Hill, 52 N.C. App. 620, 279 S.E.2d 102 (1981).]

D. Termination of power of sale.

1. The debtor has the right to terminate the power of sale by curing the

default under the terms of the instrument or by paying the total

obligation plus expenses under the statute. [G.S. § 45-21.20]

Expenses incurred with respect to sale or proposed sale include

attorney fees. [In re Newcomb, 112 N.C. App. 67, 434 S.E.2d 648

(1993).]

2. Debtor frequently is given the right to cure the default in the

instrument itself. This may or may not include the right to pay the

arrearage only and reinstate the loan without accelerating the full

balance of the loan.

a) Right to cure may require that the debtor pay the full balance

of the loan, rather than the arrearage amount only. This is

known as “acceleration”.


130.37

b) Acceleration limits the debtor’s right to cure the default by

requiring that the entire loan balance be paid in full.

3. Clerk may need to review the requirements for acceleration in the

promissory note to determine whether the lender has complied with

the requirements for acceleration, which may affect how default can

be cured.

4. Debtor can terminate the power of sale before the sale (or before

expiration of time for submitting upset bid) by tendering payment of

the obligation secured (whatever that amount, accelerated or not)

along with all expenses incurred, including the trustee’s fee, if any.

[G.S. § 45-21.20] (See G.S. § 45-21.15 regarding trustee’s

compensation.)

E. Sale procedure.

1. Trustee may appoint an agent or attorney to conduct the sale; the

appointment may be oral. [G.S. § 45-7]

2. Person conducting the sale invites offers from those attending and

accepts the bid of highest bidder.

a) Trustee (or agent) may not personally bid on or purchase the

property at the foreclosure sale. [Davis v. Doggett, 212 N.C.

589, 194 S.E. 288 (1937).] (See section II.A at page 130.3

regarding role of trustee.) But the common practice of a

trustee placing a bid on behalf of the lender does not violate

this rule because the lender is the bidder, not the trustee.

b) Lender may bid on property secured by deed of trust.

[DeBruhl v. L. Harvey & Son Co., 250 N.C. 161, 108 S.E.2d

469 (1959); Elks v. Interstate Trustor Corp., 209 N.C. 832,

184 S.E. 826 (1936).] (See section I.A.2 at page 130.1

regarding lender in two-party mortgage.)

(1) In the vast majority of foreclosure sales, the bidder is

the lender and the amount bid will be the total of the

principal and interest on the indebtedness and costs

of the foreclosure.

c) Debtor may bid on the property at the foreclosure sale. [In re

Sale of Land of Sharpe, 230 N.C. 412, 53 S.E.2d 302

(1949).]

3. Purchaser must be able to pay a cash deposit, if required.

a) Trustee must comply with any provisions in the deed of trust

requiring a cash deposit. [G.S. § 45-21.10(a)]

b) If there is no provision in the deed of trust, the trustee may,

in his or her discretion, require the highest bidder to make an

immediate cash deposit, not to exceed the greater of 5% of

the bid or $750. [G.S. § 45-21.10(b)]


130.38

4. Property may be re-offered immediately if the highest bidder fails to

make the required deposit. [G.S. §§ 45-21.30; 45-21.10(c)]

5. A bidder on property is bound from the moment the bid is accepted.

(See section VIII.C at page 130.43 regarding liability of defaulting

bidder).

F. Continuance of sale.

1. If a sale has begun but is not completed by 4:00 p.m., the person

holding the sale must continue it until a designated time between

10:00 a.m. and 4:00 p.m. the following day, other than Sunday or

legal holiday when the courthouse is closed for transactions. [G.S. §

45-21.24]

2. If such a continuance is necessary, the person holding the sale must

publicly announce the time to which the sale is continued. [G.S. §

45-21.24]

G. Preliminary report of sale.

1. Within 5 days following the sale to the highest bidder, the person

exercising power of sale must file a preliminary report of sale with

the clerk of county where sale took place. [G.S. § 45-21.26]

2. The form is REPORT OF FORECLOSURE SALE/RESALE (AOC-

SP-400).

3. Upon trustee’s failure to file the required report of sale, the clerk

may order the trustee to file a correct and complete report within 20

days after service of the order on him or her. [G.S. § 45-21.14]

a) There is no form for ordering the filing of a correct and

complete report, but the clerk can modify ORDER TO FILE

ACCOUNT (AOC-SP-915M).

b) Some clerks prefer to precede an order to file the report of

sale with a notice to file the report. The clerk may modify

NOTICE (AOC-SP-404).

c) If the trustee fails to comply with the order, the clerk may

initiate civil contempt proceedings against trustee and

commit the trustee to jail until he or she complies. [G.S. §

45-21.14] See G.S. § Chapter 5A, Article 2, for

requirements of civil contempt hearing and imprisonment for

civil contempt and proceed with care.

H. When rights of parties fixed.

1. No confirmation of sale is required. [G.S. § 45-21.29A]

2. Rights of the parties to sale become fixed if no upset deposit is filed

with the clerk by the close of normal business hours on the 10th day

after filing preliminary report of sale. [G.S. § 45-21.27(a); G.S. § 45-

21.29A]


130.39

a) Debtor loses the right to equity of redemption at the

expiration of the 10-day period if no upset bid is filed. [In re

Smith, 24 B.R. 19 (Bankr. W.D.N.C. 1982).]

b) Bidder’s contractual right to delivery of the deed upon

tender of the purchase price is fixed upon expiration of the

10-day period if no upset bid is filed. [Sprouse v. North

River Ins. Co., 81 N.C. App. 311, 344 S.E.2d 555 (1986).]

The period expires at the close of business on the tenth day.

c) Trustee’s contractual right to hold the bidder liable for the

purchase price is fixed at the expiration of the 10-day period

if no upset bid is filed. [Id.]

d) Debtor’s right to possession is not affected by the expiration

of the 10-day period; debtor retains an insurable interest and

the right to possession until the purchase price is paid and

the deed delivered. [Id.]

VII. Upset Bids [G.S. § 45-21.27]

A. An “upset bid” is a bid or offer to buy real property for a higher price than

the property sold for at the original sale or prior upset bid.

B. There is no resale after an upset bid; rather each upset bid is followed by

period of 10 days for a further upset bid.

C. Requirements of upset bid.

1. Determine whether the upset bid was filed in proper time.

a) The upset bid must be deposited with the clerk within 10

days after the report of sale or the last notice of upset bid is

filed. [G.S. § 45-21.27(a)]

(1) The ten-day period begins after the filing of the

report of sale, not after the date of the sale.

b) In counting the ten-day period, the following rules apply.

(1) Day one is the day after the report of sale is

received by the clerk. [G.S. § 1A-1, Rule 6]

(2) If the tenth day falls on a Saturday, Sunday, or a

legal holiday when the courthouse is closed for

transactions, the bid must be filed by the close of

normal business hours on the next day that the office

is open for business. [G.S. § 45-21.27(a)]

c) Deposit must be filed by the close of normal business hours

on the 10th day after filing of report of sale. Deposit means to

be in the actual possession of the clerk’s office by the end of

the 10th day. [G.S. § 45-21.27(a)]

2. Determine whether the amount of the upset bid is adequate.


130.40

a) An upset bid must exceed the reported sales price by at least

5%, but in any event the minimum increase is $750. [G.S. §

45-21.27(a)]

(1) Clerk cannot require an upset bid in excess of the

amount required by statute. [In re Sale of Land of

Sharpe, 230 N.C. 412, 53 S.E. 2d 302 (1949).] (The

clerk can require the bidder to file a compliance

bond as well as the deposit. See Section VII.E at

page 130.42)

(2) However, there is nothing to prevent a bidder from

making an upset bid higher than the minimum

required by statute.

3. Determine whether the upset bidder made a proper deposit.

a) The upset bidder must make a deposit with the clerk of an

amount equal to 5% of the amount of the upset bid, but at

least $750.

b) Deposit must be made in cash, certified check, or cashier’s

check satisfactory to the clerk. [G.S. § 45-21.27(a)]

c) There is no authority which would allow clerk to accept a

check that is not a certified or cashier’s check.

4. Determining the minimum amount of the upset bid and the amount

of the upset deposit is a two-step process.

a) Bid. First, the clerk must determine the amount of the upset

bid. Multiply the last highest bid by 5%; if that number is

higher than $750, add the number to the last bid to get the

minimum amount of the upset bid. If the number is less than

$750, add $750 to the last bid to get the minimum amount

for the upset bid.

b) Deposit. Second, the clerk must determine the amount

required to be deposited by the upset bidder. Multiply the

amount of the qualifying upset bid by 5%; if that number is

more than $750, the number is the amount of the upset

deposit. If the number is $750 or less, the upset deposit is

$750.

c) Example 1. The high bid at the sale (or last upset bid) is

$25,000. The minimum increase is $1,250 (5% of the last

bid); so the upset bid is $26,250 ($25,000 + $1,250). The

upset deposit would be $1,312.50 (5% of the upset bid of

$26,250).

d) Example 2. The high bid is $10,000. The minimum increase

for an upset bid is $750 because 5% of $10,000 is less than

$750. Therefore, the minimum upset bid is $10,750. The

upset deposit is $750 (because 5% of $10,750 is less than

$750).


130.41

e) Example 3. The high bid is $14,500. Since 5% of $14,500 is

$725, the minimum increase would be $750. Therefore the

minimum upset bid would be $15,250. The upset deposit

would be $762.50, which is 5% of $15,250 upset bid. (In this

case, the $750 floor would be greater than 5% of the

previous bid so the upset bid would be the previous bid plus

$750; but 5% of the upset bid would be greater amount than

$750, so the upset deposit would be 5% of the upset bid.)

f) Example 4. In Example 1 the minimum upset bid is

$26,250, but the bidder may make a higher upset bid.

Suppose the bidder enters an upset bid of $30,000. In that

case, the amount to be deposited would be $1,500 (5% of the

$30,000).

5. The clerk should not accept a bid filed after the close of business

hours on the tenth day. The high bidder’s right to purchase at the

price bid is fixed at the end of the tenth day after the report of sale is

filed, if no upset bid has been filed.

6. Debtor has the right to pay off the indebtedness plus all expenses of

sale, including trustee’s fee, if any, before the time for upset bids has

expired and terminate the power of sale. [G.S. § 45-21.20]

D. Notice of upset bid.

1. At the same time that an upset deposit is filed, the upset bidder must

also file a notice of upset bid. [G.S. § 45-21.27(e)]

2. The form is NOTICE OF UPSET BID NOTICE TO TRUSTEE OR

MORTGAGEE (AOC-SP-403).

3. Contents of notice of upset bid. [G.S. § 45-21.27(e)]

a) Name, address, and telephone number of upset bidder;

b) Amount of the upset bid;

c) State that the sale will remain open for a period of 10 days

after date on which notice of upset bid is filed for the filing

of further upset bids; and

d) Be signed by the upset bidder or the upset bidder’s attorney

or agent.

4. Clerk must notify the trustee when a notice of upset bid is filed.

[G.S. § 45-21.27(e)]

5. Trustee must give written notice of upset bid to the last prior bidder

and current record owners of property. [G.S. § 45-21.27(e)]

a) Notice must be given by first class mail to last known

address. [G.S. § 45-21.27(e)]

b) If the trustee fails to notify the proper parties, upon motion

of the trustee, the clerk may extend the time for filing upset

bids under the clerk’s authority to make all orders as may be


130.42

just and necessary to safeguard the interests of all parties.

[G.S. § 45-21.27(h)]

E. Compliance bonds.

1. Upon motion of the trustee, the clerk may require an upset bidder to

deposit a cash bond (or surety bond, at the option of the bidder,

approved by the clerk) in an amount not to exceed the total amount

of the upset bid less the amount of required deposit. [G.S. § 45-

21.27(b)]

a) Example. Bidder files an upset bid of $26,250 and deposits

$1312.50. Clerk may require bidder also to deposit a cash

bond or surety bond of $24,937.50 ($26,250 minus 1312.50)

2. Practical issues in requiring compliance bond.

a) Some clerks give notice to everyone who has bid before that

a compliance bond will be required to be filed along with an

upset deposit.

b) Some clerks will not impose a compliance bond until there

has been a default by a bidder and the notice of resale

includes as a term of the sale that the bidder must post a

compliance bid.

c) One factor for the clerk to consider in requiring a compliance

bond is whether it will have the effect of chilling the

bidding.

d) Under the current law, it may not be as necessary to require

the posting of a compliance bond in a foreclosure case as it

was under prior law when the filing of an upset bid required

readvertising and reselling the property.

3. The clerk must approve a surety bond. [G.S. § 45-21.27(b)]

4. Clerk is not bound by the initial approval of a surety bond if the clerk

subsequently finds it to be defective. [In re Miller, 72 N.C. App. 494,

325 S.E.2d 490 (1985).]

5. Compliance bonds are payable to the State of North Carolina for the

use of the parties in interest and are conditioned on the principal

obligor’s compliance with the bid. [G.S. § 45-21.27(b)]

6. An upset bid that does not meet the compliance bond requirement is

void and has no effect. [In re Miller, 72 N.C. App. 494, 325 S.E.2d

490 (1985).]

F. Upset bidder is subject to the terms of the original notice of sale unless it has

been modified by court order. [G.S. § 45-21.27(g)]

G. Release of prior bidder. When an upset bid is filed that complies with the

statute, the last prior bidder is released from any further obligation on

account of his or her bid, and the clerk must release any deposit or bond

provided by bidder on the prior upset bid. (Likewise, the trustee must release


130.43

the deposit on the original sale when an upset bid is filed.) [G.S. § 45-

21.27(f)]

VIII. Defaulting Bidders [G.S. § 45-21.30]

A. If the terms of the order of sale require the highest bidder to make a cash

deposit at the sale and the bidder fails to do so, the person holding the sale

must again offer the property for sale at the same time and place. [G.S. § 45-

21.30(a)]

B. When the highest bidder at sale or resale or an upset bidder fails to comply

with the bid after tender or a bona fide attempt to tender a deed for the

property, the clerk, upon motion, may enter an order authorizing a resale.

The procedure for the resale is the same as the procedure for the original sale,

except that the notice of hearing and hearing requirements of G.S. § 45-21.16

are not applicable. [G.S. § 45-21.30(c); In re Foreclosure of Earl L. Pickett

Enter., 114 N.C. App. 489, 442 S.E.2d 101 (1994) (holding a new

foreclosure hearing after default by bidder is improper).]

C. A defaulting bidder is liable on the bid to the extent that the final sales price

is less than defaulting bid, plus all costs of resale. [G.S. § 45-21.30(d).; see In

re Foreclosure of Deed of Trust of Allan & Warmbold Constr. Co., 88 N.C.

App. 693, 364 S.E.2d 723 (1988).]

1. Trustee is the real party in interest in an action against a defaulting

bidder. [Union Grove Milling & Mfg. Co. v. Faw, 109 N.C. App.

248, 426 S.E.2d 476, aff’d per curiam, 335 N.C. 165, 436 S.E.2d

131 (1993).]

2. Judgment creditor has no right to sue a defaulting bidder in order to

increase the surplus funds. [Id.]

D. The clerk must hold the deposit or compliance bond made by a defaulting

bidder because the deposit and bond secure payment of the amount for which

the defaulting bidder remains liable. [G.S. § 45-21.30(d)]

E. Procedure for claiming deposit/determining defaulting bidder’s liability.

1. Upon motion, clerk may give deposit to trustee to apply to default

damages. [Cf. Gilliam v. Sanders, 198 N.C. 635, 152 S.E. 888

(1930).]

a) Before giving deposit to trustee clerk should give notice to

the defaulting bidder to appear and show cause why the

money should not be turned over to the trustee to apply to

the default.

b) Trustee then accounts for deposit in the final report of sale.

2. It is not clear whether a clerk has the authority, upon motion, to

determine the full amount of the deficiency because of the default

when it is more than the deposit. Some cases seem to indicate that

the clerk has authority to determine the deficiency. [See In re

Foreclosure of Deed of Trust of Allan & Warmbold Constr. Co., 88


130.44

N.C. App. 693, 364 S.E.2d 723 (1988) (appeal challenging the

confirmation of a resale after setting aside bid of defaulting bidder;

appellate court remanded to superior court for entry of judgment

establishing defaulting bidder’s indebtedness to trustee); Marsh v.

Nimocks, 122 N.C. 478, 29 S.E. 840 (1898) (proper remedy for bid

against defaulting bidder in judicial sale is motion in cause, not

independent action); Gilliam v. Sanders, 198 N.C. 635, 152 S.E. 888

(1930).] However, many clerks require the trustee to bring a civil

action to determine the deficiency if the trustee seeks more damages

than the defaulting bidder’s deposit.

F. Defaulting bidder is entitled to a refund of his or her deposit after the

property is resold for amount in excess of the bid of defaulting bidder plus

expenses of resale. [Harris v. American Bank & Trust Co., 198 N.C. 605,

152 S.E. 802 (1930).]

NOTE: Procedure for defaulting bidder in foreclosure under power of sale is

similar to that of judicial sale. (See Judicial Sales, Civil Procedures, Chapter

43.)

G. Judge has power under equity to relieve the purchaser at sale when there is

an irregularity in the sale combined with a grossly inadequate or grossly

inflated bid. [Pittsburgh Plate Glass Co. v. Forbes, 258 N.C. 426, 128 S.E.

2d 875 (1963).]

1. Appellate court has not decided whether the clerk would have the

power to relieve the purchaser at the sale for irregularity. In

Pittsburgh Plate Glass Co. v. Forbes, the court said, “it is

unnecessary to inquire whether the clerk lacked authority to act”

because in that case the clerk had transferred the motion to set aside

the bid to the judge.

IX. Disposition of Proceeds of Sale [G.S. § 45-21.31]

A. The person making the sale is required to apply the proceeds in the following

order:

1. Costs and expenses of sale, trustee’s commission, if any, and

reasonable auctioneer’s fee, if any. [G.S. § 45-21.31(a)(1)] These

costs and expenses should also include advertising fees, fees to the

trustee’s office, etc.

a) When a sale is held, the trustee is entitled to compensation, if

any, as stipulated in the deed of trust. [G.S. § 45-21.15]

b) Although this statute does not specifically provide for the

payment of attorney fees, a non-lawyer trustee might require

legal advice and assistance and sums paid would properly

constitute an expense incurred by the trustee. [In re

Foreclosure of Newcomb, 112 N.C. App. 67, 434 S.E.2d 648

(1993).]

c) See sections II.D and II.E at pages 130.4 and 130.5

regarding compensation of trustee and issue of attorney fees.


130.45

2. Taxes due and unpaid, unless the property was sold subject to taxes

as per the notice of sale. [G.S. § 45-21.31(a)(2)]

3. Any special assessments against the property, unless the property

was sold subject to assessments as per the notice of sale. [G.S. § 45-

21.31(a)(3)]

NOTE: In almost all cases, property will be sold subject to taxes and

special assessments, but the notice of sale must so state.

4. Obligation secured by deed of trust, including interest and any other

expenditures paid by the holder as a result of the default, such as

insurance or taxes. [G.S. § 45-21.31(a)(4)]

a) If an attorney is hired to represent the lender at the

foreclosure hearing in a case in which the deed of trust has

an attorney fees provision, the attorney fees for the lender

are part of the obligation secured by deed of trust, and the

trustee may pay the attorney fees to the lender’s attorney

under this section. [In re Foreclosure of Ferrell Bros. Farm,

Inc., 118 N.C. App. 458, 455 S.E. 2d 676 (1995).]

B. Surplus. If there is any surplus remaining after the application of proceeds as

set forth above, it is to be paid to the persons entitled to it, if known, or, if not

known, to the clerk. [G.S. § 45-21.31(b)]

1. Surplus must be paid to clerk in all cases where:

a) Owner of sold property is dead and has no acting personal

representative;

b) Trustee or vendor is unable to locate persons entitled to

surplus;

c) Trustee or vendor is in doubt as to who is entitled to surplus

money; or

d) Adverse claims are asserted. [G.S. § 45-21.31(b)]

2. It is a good practice for the clerk to require an affidavit from the

trustee indicating that the trustee is unable to determine who is

entitled to the proceeds and setting out the facts as to why one of the

four conditions allowing transfer to the clerk exist. The clerk may

refuse to accept the surplus proceeds if the trustee does not

establish a proper basis for submitting them to the clerk.

3. Payment to the clerk discharges the trustee or vendor from liability to

extent of amount paid. [G.S. § 45-21.31(c)]

a) Clerk must give a receipt for the money received. [G.S. § 45-

21.31(d)]

b) Clerk is liable on official bond for the safekeeping of money

received until paid to parties entitled to it, or until it is paid

out under an order of a court of competent jurisdiction. [G.S.

§ 45-21.31(e)]


130.46

4. Clerk holds the surplus money for safekeeping and has no interest in

it other than protection from liability on official bond. [Koob v.

Koob, 283 N.C. 129, 195 S.E.2d 552 (1973) (clerk challenged

authority of district court in alimony action to determine how surplus

funds from foreclosure should be distributed).]

5. There is no limit on the amount of surplus funds that may be paid

over to the clerk under the provisions of G.S. § 45-21.31. [Lenoir

County v. Outlaw, 241 N.C. 97, 84 S.E.2d 330 (1954).]

C. Disposition of surplus funds.

1. Any person making a claim on the surplus funds may institute a

special proceeding to determine ownership of the funds. [G.S. § 45-

21.32] See Proceeding to Determine Ownership of Surplus Proceeds

from Foreclosure Sale, Special Proceedings, Chapter 131.

X. Final Report of Sale of Real Property [G.S. § 45-21.33]

A. Clerk has no authority to preapprove costs and expenses of sale including

trustee’s commission and auctioneer’s fee. Those are within sole province of

trustee. [In re Foreclosure of Deed of Trust from Webber, 148 N.C. App.

158, 557 S.E.2d 645 (2001).]

1. Remedy for a trustee who seeks guidance as to application of

payments is to institute a declaratory judgment action.

2. Remedy for party wishing to challenge payments is to bring separate

lawsuit against trustee for breach of fiduciary duty once payments

made.

B. Person who holds a sale of real property pursuant to a power of sale must file

a final report and account of receipts and disbursements with the clerk.

1. Report must be filed within 30 days after receipt of the proceeds of

sale.

2. Form is FINAL REPORT AND ACCOUNT OF FORECLOSURE

SALE (AOC-SP-402).

3. Report must show whether property was sold as a whole or in parts,

whether all the property was sold, and whether all or only part of the

obligation was satisfied. [G.S. § 45-21.33(a)]

C. Clerk audits the account and records it. [G.S. § 45-21.33(b)]

1. The clerk audits the account but does not approve it.

2. In conducting the audit, the clerk is merely authorized to determine

whether entries in the report reflect the actual receipts and

disbursements made by the trustee. [In re Vogler Realty, Inc., 722

S.E.2d 459 (N.C. 2012) (holding that clerk does not have authority to

review for reasonableness a trustee-attorney’s payment of attorney

fees to himself or herself in the context of an audit of final sale); In

re Foreclosure of Ferrell Bros., 118 N.C. App. 458, 455 S.E.2d 676

(1995).]


130.47

3. In auditing the final account, clerk should make sure that there are

proper vouchers or documentation for each receipt or disbursement

entered on final report and account when possible.

a) Check to see that all disbursements have been made as

indicated. Methods of determining whether disbursement has

been made are:

(1) Cancelled checks, vouchers, or receipts.

(2) When the noteholder is the purchaser, there won’t be

a check to document the transaction but there should

not be a problem with accepting the report of the

trustee.

(2) When the purchaser is not the noteholder and the

check has not had time to clear, the clerk might

require the trustee to include an affidavit from the

noteholder indicating payment.

b) Much of the time it is impossible to properly audit the

account because of a “Catch 22” situation. The trustee may

have given the deed to the purchaser’s attorney, but it has

not been recorded and the trustee has not received and

disbursed the funds at the point of filing the final report of

sale. The purchaser’s attorney will not record the deed nor

release the purchase funds until the clerk has audited the

account and filed it because there may be some irregularity

that would require an additional action in the foreclosure.

Therefore, the trustee cannot show the clerk any cancelled

check because one has not yet been delivered. In that case,

the best that the clerk may be able to do is require the trustee

to show the clerk the check prepared but not delivered to

disburse the funds. Even that might be a problem because the

attorney/trustee should not write a check on the trust account

before the sale proceeds are deposited in the account.

D. Fees which should appear on the final account (in addition to those set forth

in G.S. § 45-21.31 and section IX.A at page 130.44) include:

1. Fee for foreclosure under power of sale in deed of trust as per G.S. §

7A-308(a)(1).

2. Additional fee of $0.45 per $100.00 of final sale price, with a

minimum fee of $10 and a maximum of $500. [G.S. § 7A-308(a)(1)]

Note: Check the statute to determine if the additional fee has been

changed since this chapter was published.

a) If a federal agency is named as payee on the note and named

beneficiary under the deed of trust and if final sales price is

less than the entire balance due on loan (including principal,

interest, fees, etc.) plus all costs of sale, including the

additional fee, then the additional fee should not be assessed

or collected. The fee is not collectable where the ultimate


130.48

burden of paying the fee falls upon the federal government.

[See Whitley v. Griffin, 737 F. Supp. 345 (E.D.N.C. 1990).]

b) In all other cases (including where a federal agency

guaranteed the loan, was the highest bidder at the sale, was

assigned the bid by another bidder, or where the final sales

price equals or exceeds the entire balance due on the loan

plus all costs of sale including the additional fee), the

additional fee must be assessed and collected.

c) Federal agencies which commonly make loans or guarantee

loans of private lending institutions include Farmers Home

Administration (FHA), Federal National Mortgage

Association (FNMA), Government National Mortgage

Association (GNMA), Federal Home Loan Mortgage

Corporation (FHLMC), Housing and Urban Development

(HUD), Federal Home Loan Bank, Federal Savings and

Loan Associations, Federal Credit Unions, Federal Land

Bank, Small Business Administration, Federal Financing

Bank, and Federal Reserve Banks.

3. Recordation fee for Trustee’s Deed (clerk may want to require

trustee to provide Book and Page number on account).

4. Recordation fee for Notice of Foreclosure as per G.S. §§ 45-38 and

161-10.

E. Person who holds the sale must also file with clerk the following:

1. Copy of notices of sale and resale, if any, which were posted;

2. Copy of notices of sale and resale, if any, which were published,

with affidavit of publication; and

3. Proof as required by the clerk that notices of hearing, sale and resale

were served on all parties entitled to notice. [G.S. § 45-21.33(c)]

a) The way a clerk requires proof is by certification on the form

itself, although a clerk could require some other method of

proof.

4. In the absence of an affidavit to the contrary, an affidavit by the

person holding the sale that notice of sale was posted in area

designated by clerk for posting public notices in proper county 20

days before sale is proof of compliance with requirements of G.S. §

45-21.17(1)(a). [G.S. § 45-21.33(c)]

F. Clerk may issue an order to compel the filing of a correct and complete

report or account as required by statutes within 20 days, and upon a failure to

comply may initiate civil contempt proceedings against person. [G.S. § 45-

21.14]

1. See ORDER (AOC-SP-915M). And if the clerk wishes to precede

the order with a notice to file a correct and complete report, use

NOTICE (AOC-SP-404).


130.49

2. See G.S. § Chapter 5A, Article 2, for requirements of imprisonment

for civil contempt and proceed with care.

XI. Orders of Possession [G.S. § 45-21.29]

A. Clerk may issue an order for possession of real property sold in favor of the

purchaser and against any party in possession when:

1. Property is sold in exercise of the power of sale;

2. Statutory provisions have been complied with;

3. Sale has been consummated and purchase price has been paid;

4. Purchaser has acquired title to and is entitled to possession;

a) The purchaser is not entitled to possession if the occupant is

a bona fide tenant. [Protecting Tenants at Foreclosure Law,

P.L. 111-22; 16 STAT. 1633. This law is set to expire

December 31, 2012.] Therefore, person seeking order of

possession must demonstrate that occupant of residential

property is not a bona fide tenant.

b) Federal law overrides state foreclosure law which has held

that upon foreclosure, tenant has no right to continued

possession of the premises. Under the Protecting Tenants at

Foreclosure Law the purchaser at foreclosure sale of

residential property must honor any lease on the property,

whether oral or written. The purchaser of the property takes

the property subject to the lease and becomes the landlord of

the tenant.

c) A person is a bona fide tenant if all of the following are true:

(1) The occupant is not the former owner, or the spouse,

child, or parent of the former owner;

(2) The lease agreement is the product of an arms-length

transaction; and

(3) The rent required by the lease is not substantially

less than the fair rental value of the property, or if it

is, the rent is reduced by a government subsidy.

5. Ten days’ notice has been given to party who remains in possession

or in the case of residential property with 15 or more rental units, 30

days’ notice has been given to parties who remain in possession; and

6. Application is made by petition to the clerk by the trustee, the

mortgagee (lender), the purchaser of the property, or an authorized

representative of any of the three. [G.S. § 45-21.29(k)]

B. Clerk must make sure the trustee has complied with the six requirements for

issuance of the order and may require an affidavit by the trustee indicating

compliance. [G.S. § 45-21.29(k)]


130.50

C. Order of possession must be directed to the sheriff and must authorize the

sheriff to remove all occupants in possession and their personal property

from premises and to put the purchaser in possession.

1. Order is executed in the same manner as a writ of possession in a

summary ejectment proceeding under G.S. § 42-36.2. [G.S. § 45-

21.29(l)] (See Writs of Possession for Real Property, Civil

Procedures, Chapter 39.)

2. Purchaser has the same rights and remedies in connection with

execution of the order as does a landlord under North Carolina law

including Chapters 42 and 44A of the General Statutes, which means

that the purchaser can choose to have the sheriff padlock the

premises and can dispose of personal property left by the possessor

as provided by Chapters 42 and 44A.

3. When real property sold is located in more than one county, orders

of possession must be issued for each county in which property

located. [G.S. § 45-21.29(m)]

D. Purchaser is not entitled to possession until the purchase price is paid and the

deed has been delivered; the debtor may remain in possession pending the

closing. [Sprouse v. North River Ins. Co., 81 N.C. App. 311, 344 S.E.2d 555

(1986).]

XII. Effect of Bankruptcy on Foreclosure

A. Automatic stay.

1. The federal bankruptcy law provides that the filing of a bankruptcy

petition operates as a stay, applicable to all entities, of

a) The commencement or continuation, including the issuance

or employment of process, of a judicial proceeding that was

or could have been commenced before the filing of the

petition or to recover a claim against the debtor that arose

before the filing of the petition.

b) The enforcement against the debtor or against property of the

debtor of a judgment obtained before the filing of the

petition.

c) Any act to obtain possession of debtor’s property.

d) Any act to create, perfect, or enforce any lien against

debtor’s property.

e) Any act to create, perfect, or enforce against property of the

debtor any lien to the extent the lien secures a claim that

arose before the filing of the petition. [11 U.S.C. § 362]

2. The stay is automatic upon the filing of the petition, and the debtor

does not have to file any paper with the clerk to make it effective. A

clerk may subject himself or herself to contempt by ignoring an

undocumented claim by the debtor that he or she has filed

bankruptcy.


130.51

3. However, if the debtor claims he or she has filed a bankruptcy

petition and the trustee is not aware of the filing, the clerk may take a

recess in the proceeding to allow the trustee to contact the

bankruptcy clerk to determine if a petition has been filed.

B. If the stay applies, the filing of the petition stops any further action in the

state court regarding the foreclosure unless the bankruptcy court lifts the

stay.

1. If the bankruptcy petition is filed before the foreclosure hearing is

held, the clerk may not hold the hearing.

2. If it is filed after the hearing but before the sale, no sale may be held.

3. If it is filed after the sale but before the time for the filing of an upset

bid, the clerk cannot accept an upset bid. [In re DiCello, 80 B.R. 769

(Bankr. E.D.N.C. 1987); see also In re Adams, 86 B.R. 867 (Bankr.

E.D.N.C. 1988).]

4. Return of deposit. If the foreclosure sale is stayed before the upset

bid period expires:

a) The clerk who received the deposit shall release the deposit

to the upset bidder upon receipt of a certified copy of an

order or notice from the bankruptcy court indicating that the

debtor has filed a bankruptcy petition; or

b) The trustee who received a cash deposit from the high bidder

at the foreclosure sale, upon notification of the stay, shall

release any deposit to the high bidder. [G.S. § 45-21.22(d)]

5. If the petition is filed after the foreclosure is complete (the 10-day

period for filing upset bids has run without an upset bid being filed),

the stay does not affect the foreclosure because the property is not

property of the estate of the bankrupt. [In re Barham, 193 B.R. 229

(Bankr. E.D.N.C. 1996); In re Sarver, 2010 WL 3501795 (M.D.N.C.

2010) (finding that debtor had no redemption right where bankruptcy

petition filed at 5:01 p.m. on last day of upset bid period, thus

creditor could obtain and record deed and recover possession); cf. In

re Hollar, 184 B.R. 243 (Bankr. M.D.N.C. 1995).]

a) Transfer of the deed after the filing of the petition does not

violate the automatic stay. [In re Cooke, 127 B.R. 784

(Bankr. W.D.N.C. 1991).]

b) Clerk could enter an order of possession to remove

defendant, upon proper motion by trustee or purchaser.

C. Lifting the stay.

1. There are several grounds under which a trustee may proceed with

the foreclosure after a bankruptcy petition has been filed:

a) The stay is lifted with regard to the foreclosure procedure.

b) The bankruptcy court allows an abandonment of the property

that is the subject of the foreclosure.


130.52

c) The bankruptcy is dismissed.

2. In order for the clerk to proceed with the foreclosure, the trustee

must file with the clerk a copy of the bankruptcy court’s order lifting

the stay with regard to the foreclosure proceeding, abandoning the

property that is the subject of the foreclosure, dismissing the petition,

or discharging the debts.

D. When bankruptcy stay lifted.

1. If the bankruptcy petition is filed after the notice of hearing is filed

with the clerk but before the hearing is held, and thereafter the stay is

lifted, the trustee files a new notice of hearing and serves copies on

all parties.

2. If the bankruptcy petition is filed after the clerk has authorized

foreclosure but before the expiration of the upset bid period, and

thereafter the stay is lifted, terminated, or dissolved, the trustee must

readvertise the sale and hold a new sale but need not comply again

with the notice of hearing and hearing provisions of G.S. § 45-21.16.

[G.S. § 45-21.22(c)]

E. Setting aside foreclosure because of bankruptcy.

1. Occasionally an attorney for the lender or trustee will seek to have

the clerk issue an order setting aside the foreclosure and order of sale

after the sale has already occurred because the debtor had filed

bankruptcy before the sale or issuance of the order of sale. On some

occasions a deed has already been given and the lender will ask the

clerk to set aside the deed as well.

2. The effect of the bankruptcy on the foreclosure proceeding is a

federal bankruptcy question, and therefore, any orders should be

issued by the bankruptcy judge not the clerk of superior court.

3. However, some clerks will set aside the sale if no final report has

been filed, no deed has been given to the purchaser, and notice is

given to third-party purchaser who does not object. If there is any

controversy, those clerks will require the parties to go to the

bankruptcy court for resolution. Other clerks will not set aside the

sale and will require the parties to settle the matter in the bankruptcy

court.

XIII. Miscellaneous

A. Action to enjoin foreclosure sale.

1. Equitable defenses (and legal issues outside the issues listed in G.S.

§ 45-21.16(d)) may not be raised in a foreclosure hearing pursuant to

G.S. § 45-21.1 et seq., but must instead be asserted in an action to

enjoin the foreclosure sale under G.S. § 45-21.34. See Section III.I.2

at page 130.28.

2. An action to enjoin a sale filed pursuant to G.S. § 45-21.34 must be

commenced before the time that rights of parties are fixed under G.S.


130.53

§ 45-21.29A. [Swindell v. Overton, 310 N.C. 707, 314 S.E.2d 512

(1984) (decided under former law when confirmation was time rights

became fixed).]

3. If a judge dissolves an order restraining or enjoining a sale before

the date fixed for the sale, then the judge may either order that the

sale be held as previously noticed, or by order fix the time and place

for sale and notice requirements. [G.S. § 45-21.22(a)]

4. If a judge dissolves an order restraining or enjoining the sale after

the date fixed for the sale, then the judge must by order fix the time

and place for sale and notice requirements. [G.S. § 45-21.22(b)]

B. Motion to set aside defective sale.

1. Sometimes when there is a significant defect in the sale, the trustee

may seek an order to set the sale aside and begin again.

2. Be careful about setting aside a sale to cure a defect. If the final

report has been filed and the deed has been given to the purchaser, it

is too late for the clerk to set aside the sale. [In re Hackley, 713

S.E.2d 119 (N.C. App. 2011) (dismissing as moot the appeal of a

foreclosure order where sale had been completed and deed had been

transferred).]

C. Sale of separate tracts in different counties.

1. As indicated, when one tract of land is located in two or more

counties, the sale may be held in any county in which the land is

located; the hearing must be held in one of the counties in which the

land is located (not necessarily same county where sale is held); and

the notice of sale provisions must be complied with in each county in

which property is located. [G.S. §§ 45-21.4; -21.16, -21.17]

2. When separate tracts are located in different counties there must be

separate advertisement, sale, and report of sale in each county. [G.S.

§ 45-21.7]

a) Each county in which a sale will occur sets up a special

proceeding case file.

b) The report of sale of property in any one county shall be

filed with the clerk in that county. (If the place of hearing is

different from the place of sale, it may be good practice to

also file a copy of the report in the county where the hearing

is conducted and court file is located.)

c) Sale of each tract is subject to a separate upset bid.

d) The clerk has jurisdiction over upset bids for the tracts of

property situated in his or her county.

e) To the extent the clerk deems it necessary, the sale of each

separate tract within a county with respect to which an upset

bid is received shall be treated as a separate sale for

determining the applicable procedure.


130.54

f) Exercise of power of sale with respect to separate tract in

one county does not extinguish the right to exercise the

power of sale with respect to other tracts in other counties to

satisfy the obligation secured by the deed of trust.

D. Sale as a whole or in parts. [G.S. § 45-21.8, -21.9]

1. If the deed of trust provides that the property must be sold as whole

or in parts, those terms must be complied with. [G.S. § 45-21.8(a)]

2. If there is no specific provision, trustee may, in his or her discretion,

sell the property as a whole, sell it in parts or parcels as described in

the instrument, or offer by each method and sell by method which

produces the highest price. [G.S. § 45-21.8(b)]

3. If selling in parts, the sale of each part is subject to a separate upset

bid, and the clerk may thereafter treat the sale of each part as a

separate sale. [G.S. § 45-21.8(b)]

a) If tracts are sold separately, the trustee should report each

separately. There should be one report of sale for each tract

of land.

b) If an upset bid is received on one tract, but not all, the trustee

may file a final report of sale for the tracts sold before the

final sale on the tract for which an upset bid is filed. In

determining when the maximum is reached in assessing costs

based on the value of the property sold, the costs should be

assessed on each report of sale.

4. If selling in parts, the trustee should sell as many parcels as seems

necessary to satisfy the obligation, plus costs and expenses. [G.S. §

45-21.9(a)]

a) If the proceeds from only part are insufficient, the trustee

may readvertise the unsold property and sell as many

additional parcels as are necessary to satisfy the debt. [G.S. §

45-21.9(b)]

b) A trustee who sells additional parcels must give notice of

sale pursuant to G.S. § 45-21.17, but need not comply with

hearing requirements of G.S. § 45-21.16. [G.S. § 45-21.9(b)]

E. Simultaneous foreclosure of two or more instruments. [G.S. § 45-21.9A]

1. If the same property secures in whole or in part two or more deeds of

trust held by the same person and there are no intervening liens

except for taxes, the trustee can combine obligations secured by the

deeds of trust and sell the property once to satisfy the combined

obligations if:

a) Each deed of trust contains a power of sale;

b) No deed of trust contains a provision preventing

simultaneous foreclosure;


130.55

c) Trustee can comply with the terms governing foreclosure

sales in each deed of trust; and

d) Trustee can comply with the statutory requirements of

foreclosure sale for each deed of trust. [G.S. § 45-21.9A]

e) Proceeds of sale applied as per statutes, with the proceeds of

combined obligations being applied in order of priority of

the deeds of trust securing them and any deficiencies

determined accordingly. [G.S. § 45-21.9A]

F. Statute of limitations.

1. Power of sale cannot be exercised when a civil action to foreclose

would be barred by the statute of limitations. [G.S. § 45-21.12(a)]

a) Sale commenced within the time allowed by the statute of

limitations may be completed even though effected after the

time when commencement of the action would be barred.

[G.S. § 45-21.12(b)]

b) Sale is commenced when the notice of hearing or notice of

sale is first filed, given, served, posted or published,

whichever occurs first. [G.S. § 45-21.12(b)]

2. Statute of limitations for foreclosure by power of sale contained in

deed in trust is 10 years after default or the last payment is made.

[G.S. § 1-47(3)]

a) The right to exercise any power of sale contained in a deed

of trust is barred after 10 years from the maturity of any

notes secured by the deed of trust, where no payments have

been made extending the statute. [Lowe v. Jackson, 263 N.C.

634, 140 S.E.2d 1 (1965).]

b) The power of sale must be exercised within the 10-year

period following maturity of note or from the last payment

thereon. [Lowe v. Jackson, above.]

3. Fact that one note in a series is barred by the statute of limitations

does not bar the exercise of a power of sale for satisfaction or

indebtedness represented by other notes in the series. [G.S. § 45-

21.11]

XIV. Related Provisions

A. Judicial sales. [G.S. §§ 1-339.1 through 1-339.40]

1. Judicial sale procedures are applicable when the instrument is so

defective that proper foreclosure procedure must be resolved by

district or superior court action.

2. See Judicial Sales, Civil Procedures, Chapter 43.

B. Proceeding to determine ownership of surplus funds. [G.S. § 45-21.32]

1. See Proceeding to Determine Ownership of Surplus Proceeds from

Foreclosure Sale, Special Proceedings, Chapter 131.


130.56

C. Deficiency lawsuits. [G.S. § 45-21.36; 45-21.38]

1. Debtor may defend against a deficiency suit brought by the lender by

proving reasonable value of property. [See G.S. § 45-21.36]

2. Debtor may not be liable for deficiency where the indebtedness

represents a portion of the purchase price (purchase money mortgage

or deed of trust). [See G.S. § 45-21.38]

D. Renunciation of trusteeship by personal representative of deceased

mortgagee or trustee. [G.S. § Chapter 45, Article 2]


130.57

APPENDIX I File No. ________________

CHECK LIST FOR CLERKS BEFORE ENTERING ORDER OF SALE

IN FORECLOSURE CASES

1. Check deed of trust (and any substitution instruments) to make sure trustee (or

substitute trustee) has power of sale.

2. Check Notice of Hearing to make sure it contains all information required by

statute.

3. Check statute and deed of trust to make sure that all necessary parties have been

served with Notice of Hearing.

4. Check all returns of service by Sheriff (or return receipts attached to affidavits of

service by certified or registered mail) to make sure Notice of Hearing properly

served.

5. Make sure all parties were served at least 10 days before hearing, or if served by

posting, notice is posted at least 20 days before hearing.

6. If Notice of Hearing served by posting, make sure appropriate affidavit(s) filed

showing how and where posted as well as diligent efforts justifying posting.

7. Check deed of trust for additional notice requirements.

8. Make sure party requesting foreclosure is holder of valid debt, which may require

production of original note and deed of trust (or, in many cases, accurate copies) and,

depending on the circumstances, competent evidence demonstrating the chain of

transfer from holder to holder. Copies should be in court file.

9. Review note and/or deed of trust for acceleration clause, demand letter, or other

requirements which may affect default.

10. Remember that trustee is fiduciary to both debtor and creditor. If case is

contested, trustee/attorney should not introduce evidence or assume advocacy role for

either side. If debtor contests findings or objects to use of affidavits, creditor will

need to be present to testify as to debt and default.

11. Be sure to swear in any witnesses who testify at hearing.


130.58

APPENDIX II

ADMINISTRATIVE OFFICE OF THE COURTS

JUSTICE BUILDING

RALPH A. WALKER

DIRECTOR

DAVID F. HOKE

ASSISTANT DIRECTOR

PO BOX 2448 ● RALEIGH, NC 27602

PHONE: (919) 733-7107

FAX: (919) 733-1845

PETER E. POWELL

LEGAL COUNSEL

January 24, 2007

MEMORANDUM

TO: Clerks of Superior Court (Please share with your SP staff)

FROM: Peter E. Powell, Legal Counsel

SUBJECT: Foreclosures Involving Mortgage Electronic Registration Systems,

Inc. (MERS)

This memorandum addresses recent questions regarding the status of Mortgage

Electronic Registration Systems, Inc. (“MERS”) in foreclosure proceedings in North

Carolina. MERS is a company founded by various mortgage lenders and secondary market

participants to hold title to mortgage liens on behalf of lenders. MERS is often named as a

“nominee” on deeds of trust securing home loans made in North Carolina. However, its

nominee status does not make any difference with regards to whether it is the holder of the

note and has the right to foreclose.

MERS should be treated like any other note-holder seeking to foreclose in North

Carolina. As such, MERS may foreclose on a deed of trust when it satisfies the requirements

of N.C.G.S. § 45-21.16(d) by presenting evidence to the Clerk that: (1) it is the holder of the

promissory note; (2) the loan is in default; (3) the deed of trust provides for the foreclosure

remedy; and (4) notice has been given to borrower and others entitled to notice. The

questions that have arisen revolve around how the foreclosing party shows that it is the holder

of the note. In determining whether MERS is the holder, the Clerks should apply the same

standards as would be applied to any note holder.


130.59

Obviously, the original lender or a subsequent lender (assignee) may foreclose a

deed of trust in a power of sale proceeding. There is no need or requirement that an

assignment of a deed of trust be recorded. See G.S. § 47-17.2. Under North Carolina law,

when the note is duly assigned or transferred, the rights under the deed of trust follow the

note. As a result, whichever party is holder of the note is entitled to foreclose under the deed

of trust.

Any note holder, including the original lender (payee), may assign the note by

endorsement. This is typically done by an endorsement on the reverse side of the note (just

the way a check is endorsed) or on the face of the note. If the note is properly

assigned/endorsed, the deed of trust follows the indebtedness and the holder of the note is

entitled to foreclose under power of sale. An endorsement may be either “in blank” or to a

specified person or entity, as follows:

“Pay to the order of:

/s/ Joe Mortgage Mann

President, First National Bank” (This is a blank endorsement.)

OR

“Pay to the order of:

Mortgage Electronic Registration Systems, Inc.

/s/ Joe Mortgage Mann

President, First National Bank” (This is an endorsement to a specific

assignee.)

If the endorsement is in blank, then whoever has possession of the note is the holder.

In the specific endorsement example above, Mortgage Electronic Registration Systems, Inc.

is the holder. A note also may be endorsed by an “allonge.” This is separate document that

contains the endorsement and is attached to the note. Whether by endorsement on the note or

on the allonge, MERS can be the holder, and may foreclose if it establishes the three other

evidentiary issues: that the loan is in default, the deed of trust provides for the foreclosure

remedy, and notice has been provided to the borrower and all other parties entitled to notice.

To summarize how Clerks should proceed in confirming whether the foreclosing

entity is entitled to foreclose on a Deed of Trust:

1. Original Lender is Foreclosing. When the original lender is the foreclosing entity,

foreclosure counsel or the trustee need to produce, as evidence: (i) the original or a copy of

the recorded Deed of Trust; (ii) the original or a copy of the note; (iii) an affidavit that the

indebtedness is outstanding; and (iv) proof that notice has been provided to the borrower and

all other parties entitled to notice.

2. MERS is Foreclosing. When MERS is the foreclosing entity, they must proceed as

a subsequent lender, and foreclosure counsel or the trustee need to produce, as evidence: (i)


130.60

the original or a copy of the recorded Deed of Trust; (ii) the original or copy of the note

endorsed in blank or specifically endorsed or assigned to MERS; (iii) an affidavit reciting that

MERS is the holder and that the debt is outstanding; and (iv) proof that notice has been

provided to the borrower and all other parties entitled to notice.

If the original note, as endorsed, is produced, the affidavit need not recite that MERS

is the holder, as they are obviously in possession of the note. If the original note is not

produced, and the endorsement is in blank, then the affidavit should recite that the foreclosing

party is the holder.

3. Other Entity is Foreclosing. When any subsequent lender or servicer other than

MERS is the foreclosing entity, foreclosure counsel or the trustee need to produce, as

evidence: (i) the original or a copy of the recorded Deed of Trust; (ii) the original or a copy

of the note endorsed in blank or specifically endorsed or assigned to the foreclosing lender or

servicer; (iii) an affidavit reciting that the subsequent lender is the holder and that the

indebtedness is outstanding; and (iv) proof that notice has been provided to the borrower and

all other parties entitled to notice.

If the original note, as endorsed, is produced, the affidavit need not recite that the

subsequent lender is the holder, as they are obviously in possession of the note. If the

original note is not produced, and the endorsement is in blank, then the affidavit should recite

that the foreclosing party is the holder.

In conclusion, the above suggested procedures are applicable to all foreclosures, no

matter who brings the proceeding. MERS should be treated exactly as any other holder of

indebtedness would be under the North Carolina foreclosure statutes. However, without a

proper assignment or endorsement as described above, MERS or any subsequent lender,

cannot be established as the holder of a note in which the original lender is the proper party.

Merely being named as a “nominee” in the original deed of trust is not sufficient. If you

should have any further questions concerning this matter please feel free to call me at 919-

715-4907 or Pamela Best at 919-715-4849.

SALE - UNC School of Government · 1. Foreclosure is a method of enforcing payment of a debt...

Documents

Transcript of SALE - UNC School of Government · 1. Foreclosure is a method of enforcing payment of a debt...